An acquisition target is a company that another business wishes to acquire through a friendly or hostile takeover. Identifying potential targets is important for investors. Tactics to acquire a target include buying shares on the open market, convincing shareholders to sell, or ousting dissenting board members. Takeover targets can use various tactics to repel unwanted buyers, such as a white knight strategy or poison pill defenses. Small companies that fill a new or unusual niche in the market are often targeted. Spotting potential targets can be lucrative for investors.
An acquisition target, also called a target company, is a business that another company wishes to acquire. Normally, takeovers are determined as hostile or friendly, depending on the tactic used by the bidding company. Acquisition targets are often identifiable by different qualities, and identifying which companies could be targeted is an important part of investing.
To acquire a target company, an offering company must purchase a majority of the target’s shares. This can be done by buying shares on the open market, convincing shareholders to sell, convincing the takeover target’s board that the takeover is in their best interest, or using influence to oust dissenting board members. In an amicable takeover, the board agrees the takeover will be beneficial; in the event of a hostile takeover, the bidders will seek a majority shareholding regardless of the opinion of the board of directors.
A takeover target that is subjected to a hostile takeover attempt by a bidding company has a wide variety of tactics to repel unwanted buyers. In a white knight strategy, a third company that wishes to prevent the bidder from acquiring the target will buy enough stock to prevent the majority, while not being interested in acquiring the takeover target for itself. A gray or black knight defense is considerably riskier, as the third company may want to get the majority for itself, and the target company is left praying that the two bidders will block each other.
Depending on the board’s desperation, takeover targets could attempt one of many varieties of poison pill defenses. These involve taking on huge new debt to make the company less attractive to bidders or ensuring severe penalties for shareholders if the company is bought out. In scorched earth defense, the company enters into agreements to ensure that all assets are liquidated in the event of a takeover. The disadvantages of these harsh tactics are that if the takeover is unsuccessful, the target of the takeover is left vulnerable by the debt it has taken on or the tactics used.
According to market experts, there are numerous signs that a company may be or become a takeover target. Small companies that fill a new or unusual niche in the market will likely be snapped up by large corporations once they’ve proven themselves able to turn a profit. Companies that need additional funding to extend the availability of their products due to higher-than-expected demand are also extremely vulnerable to a takeover. In general, if a small company has a good profit history, good consumer ratings, and a well-managed structure, it will be desirable for large companies that want to increase their profit margins without the risk of starting entirely new ventures.
The ability to uncover a potential acquisition target can be an extremely lucrative skill. Having shares in an acquisition target can be advantageous, as the amount paid for them by a bidder company will normally be significantly higher than prices on the open market. Savvy investors are able to spot takeover targets before takeover attempts are made, allowing them to liquidate their shares to the bidding company with the highest possible profit margin.
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