Friendly Takeover v/s Hostile Takeover

Merger and Acquisition – Overview

In the corporate and accounting framework, Merger and Acquisition are two fundamental concepts used to describe business combinations.

A merger refers to the process in which two companies combine to form one single company. After a merger, the separate identities of the merging companies cease to exist, and a new or existing entity continues as a unified business. In simple terms, two companies merge into one.

An acquisition, also known as a takeover, occurs when one company acquires control over another company. The acquiring company becomes the dominant entity, while the acquired company loses its independent control. Although the word takeover is commonly used in general language, the term acquisition is preferred in accounting and professional contexts.

Types of Takeovers

Takeovers are broadly classified into friendly takeovers and hostile takeovers, based on the willingness of the target company.

A friendly takeover takes place with the mutual consent of both parties. The company being acquired willingly agrees to the takeover. The acquirer and acquiree engage in discussions and negotiations to determine a fair valuation of the business. Once the value is agreed upon, the consideration is paid, and control is transferred smoothly. This type of takeover is cooperative and planned.

A hostile takeover, in contrast, takes place without the consent of the target company’s management. The promoters of the target company are unwilling to sell or be taken over. Despite this resistance, the acquiring company proceeds to gain control, often by acquiring shares from the open market or using its financial strength. The term hostile literally means a takeover carried out by force or compulsion (जबरदस्ती).

Quick Summary

A merger results in the formation of a single combined company, while an acquisition involves one company taking control over another. Friendly takeovers occur with mutual agreement, whereas hostile takeovers occur against the will of the target company’s management. These concepts form the foundation of business combinations under accounting standards.