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What Is A Creeping Takeover
A creeping takeover refers to the gradual purchase of a target company’s shares by the acquirer.
The acquirer’s objective is to slowly purchase enough shares of the target company in the open market to acquire a controlling interest.
For example, if a company needs 51% and more of another company’s voting shares to acquire a controlling interest, it will slowly buy the 51% interest over the course of several years.
What differentiates a creeping takeover from a tender offer is that the acquirer purchases the shares from the target company’s shareholders on the open market by paying the going rate for the shares.
However, in a tender offer, the acquirer offers all the target company’s shareholders the same price to purchase the shares.
Also, the price offered in a tender offer is typically at a premium.
The amount paid by the acquirer to acquire the shares in a creeping takeover is the fair market value of the shares without a premium component.
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Why Use A Creeping Takeover Strategy
There are two prime reasons for acquiring a company via a creeping takeover strategy.
The first reason a company may acquire another’s shares slowly over time is to avoid paying a premium to the target company’s shareholders.
Typically, when an acquirer submits a takeover bid to the target company’s shareholders, it must offer a premium to entice the shareholders to sell.
On the other hand, when the acquirer is purchasing the shares slowly, it is acquiring the shares on the open market at the current market price without having to pay a premium.
The second reason creeping takeovers occur is that the acquirer does not intend to disburse a lot of capital to acquire the target company’s shares.
If the acquiring company’s capital structure does not allow it to take on additional debt or the company wishes to use its capital to fund the business, buying the target company’s shares slowly allows it to better absorb the acquisition costs.
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Creeping Takeovers And Securities Laws
In the United States, some companies intentionally acquire small blocks of shares of a target company specifically to circumvent the requirements of the Williams Act.
Under the Williams Act, the acquirer must offer the shareholders of the target company the same price to purchase their shares and must file all the relevant documents and disclosures with the SEC.
As such, to avoid having to submit a tender offer to the target company’s shareholders and file any paperwork with the SEC, the acquirer will purchase the shares of the target slowly over time.
The acquirer must comply with the securities laws and regulations and disclose its interest in the target company when it exceeds certain thresholds.
Pros And Cons of Creeping Takeovers
There are several advantages to acquiring a controlling interest in another company by slowly buying out their shares on the open market.
The first advantage is that the acquirer does not have to acquire a substantial number of the target’s shares by submitting a tender offer.
This means that the acquirer can use some of its capital to acquire the target company’s shares and the rest to continue funding its business.
Also, for tender offers to be successful, acquirers will need to pay the shareholders of the target company a premium so they accept to sell their shares.
Without a tender offer, the acquirer will not pay a premium to the target’s shareholders and thus will lower its acquisition costs.
On the flip side, there are two main disadvantages to moving forward via a creeping takeover strategy.
First, the acquirer must respect the laws and regulations governing creeping takeovers.
When a certain threshold of shares is purchased, the acquirer must file certain disclosures and documentation with the SEC.
If it fails to do so, it can result in a costly mistake.
The second disadvantage is that if the acquirer buys the target’s shares over time but cannot succeed in getting a controlling interest, then it may have a large investment in the target company that it did not want.
As such, liquidating that position may result in a capital loss to the acquirer.
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Creeping Takeover Example
The most famous example of a creeping takeover is that of Porsche and Volkswagon.
Starting from 2005 all the way to 2008, Porsche started purchasing shares of Volkswagon on the open market.
Although it was planning to takeover Volkswagon, it presented itself as a white squire wanting to protect Volkswagon from corporate raiders.
However, the 2008 crisis brought Porsche to a financial meltdown resulting in a significant liquidity crisis for the carmaker.
Ultimately, in 2012, Volkswagon ended up buying Porsche.
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Takeaways
So there you have it folks!
What is a creeping takeover?
In mergers and acquisitions, a creeping takeover is when a company openly purchases shares of another company over a period of time with the intention of acquiring a controlling interest.
It’s important for companies to respect the applicable laws and regulations governing this process.
Under the SEC rules, a company must disclose its position to the SEC when it has acquired a certain threshold of shares.
Creeping takeovers are effective strategies to avoid paying a premium to the target company’s shareholders, absorb the acquisition costs over a number of years, and avoid as much as possible having to file complicated and costly paperwork with the regulators.
Now that you know what is a creeping takeover and how it works, good luck with your research!
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