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A takeover bid is an offer by an acquiring company or third party to purchase a sizeable portion of equity of another company. The price offered is usually at a premium to the market price to entice investors to participate. The takeover bid will only proceed if the acquiring firm receives a certain number of shareholders who want to participate in the bid.
If the takeover bid is successful, the investor tenders their shares. This means that they sell their shares to this acquiring company. A takeover bid is successful when 90% of shares are sold to the acquiring company. When the acquirer takes over 90 per cent or more of the company, they can compulsorily acquire the remaining shares.
Reasons for takeover bids on the ASX
- An acquirer wants to buy enough stock to take over the company or if the acquirer accumulates enough stocks they can force the remaining stockholders to sell out and take over.
- The acquiring company may choose to take over businesses as they see it as an opportunity to increase the abilities of their business and increase sales.
- Acquiring company may want to gain larger market share and a competitive advantage.
- The acquiring business may want to cut business operation cost. When two businesses merge there is room to expand the business without incurring the mammoth costs involved from the expansion of a single business.
Advantages/Disadvantages of takeover bids
- Shareholders are offered above market value for their shares from a company that may have been performing poorly.
- The takeover does not need board approval as takeover bids are aimed at shareholders and will go ahead if enough shareholders accept the offer.
- The takeover bids are only available for a limited period which lessens any transactions risks such as changes in market conditions for the target business.
- Investors are not obligated to participate in the takeover bid.
- Takeover bids can create a bidding war that can increase stock prices
- You will need to pay Capital gains tax on the proceeds of the sale.
- If the acquiring company gets less than 90%, the shares may be hard to sell in the market as they will be less liquid.
- If the acquiring company gets 90% of the company, and you did not accept the takeover bid, then they can compulsorily acquire your shares.
Lauren Hua is a private client adviser at Fairmont Equities.
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