Takeover

A takeover is one company gaining control of another, usually by buying enough of its shares to control decisions at the board and shareholder level. Once complete, the acquired company typically stops trading as an independent public stock, either being absorbed into the acquirer or delisted.

Takeovers happen in a few ways. In a "friendly" takeover, the target company's management agrees to the deal and recommends shareholders accept it. In a "hostile" takeover, the acquirer goes around management directly to shareholders, often via a tender offer, which is a public offer to buy shares at a set price, usually above the current market price. Payment can be in cash, in shares of the acquiring company, or a mix of both.

The nuance that trips people up is the gap between announcement and completion. When a takeover is announced, the target's stock price usually jumps toward (but rarely exactly to) the offer price, and it tends to sit there, barely moving, until the deal closes or falls apart. That flat period reflects deal risk: regulators could block it, shareholders could reject it, financing could collapse, or a rival bidder could show up and force a higher price. Traders who buy shares after the announcement hoping to capture that last small gap to the offer price are engaging in what's called merger arbitrage, and the "small gap" can turn into a large loss if the deal breaks.

Takeover is often used loosely to mean the same thing as acquisition or merger, but in stricter usage a merger implies two companies combining into a new joint entity, while a takeover implies one company simply absorbing another, willingly or not.