Consolidation is a function of capital markets. It can happen in the form of mergers, takeovers, or acquisitions. Any of these terms can really be used to describe a transaction where two companies combine businesses or one company is absorbed into another. The real difference between takeovers and acquisitions is that the former type has more of a tendency to be a hostile transaction in which the target company may not want to be acquired. An acquisition, on the other hand, may be a friendly merger of equals.
There are many reasons why a deal can turn hostile or be shaped as a hostile takeover from the earliest discussions. The target company and its board of directors may simply prefer not to be acquired. A combination of two companies where there is overlap or redundancies could result in layoffs of top management or other employees. The target company might also feel that the value of the bid is too low, while the takeover company is opportunistically attempting to buy the target at a bargain price.
In a friendly acquisition, a target company's board of directors might come out in support of the deal publicly in tandem with the management's approval. Advocates of takeovers and acquisitions might support a deal because the two companies combined could be more competitive in an industry than either could be alone, for instance. Also, in a friendly deal, some type of arrangement is probably made with the top management so that key executives at the target company are retained in some capacity. The support of the board from the onset typically influences shareholders, who vote on takeovers and acquisitions, to welcome the deal as well.
Takeovers and acquisitions require the majority agreement of a board of directors and shareholders, an approval that is decided with a vote. A reason that shareholders might want a deal that management does not is because of profits. In this type of deal, a takeover company submits a purchase price that is comprised of cash, stock, or both. Any stock in a takeover bid price has some type of premium built into it in addition to where the stock is trading in the public markets, and shareholders stand to benefit from the difference.
In both takeovers and acquisitions, the acquiring company inherits both the business and the liabilities of the target. Excessive liabilities or debts in relation to assets could make a target company more vulnerable and also give the acquiring company more leverage in negotiating a price tag. If a company is in financial distress, it is more susceptible to a hostile takeover versus a friendly acquisition.
