Bailout Takeover - Explained
What is a Bailout Takeover?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is a Bailout Takeover?How does a Bailout Takeover Work?Academic Research on Bailout Takeover
What is a Bailout Takeover?
A bailout takeover is a takeover in which a financially strong firm or the government takes over a weak company to help it regain financial strength. A bailout takeover is often done to help a financially unstable company out of potential bankruptcy or insolvency. By purchasing the shares of a weak company, a strong company or the government can offer a bailout to an unstable firm. In a bailout takeover, the acquiring company offers financial support to a company facing troubles. This is achieved by developing a plan to help the weak company regain its financial strength.
How does a Bailout Takeover Work?
Usually, a bailout takeover is executed when a company falls into a deep level of financial weakness and every means to make it recuperate has been exhausted. A bailout takeover is often a forced acquisition in which the government or a financially stable company urgently acquires a weak company to save it from bankruptcy. Once this acquisition is executed, the acquiring entity formulates a concrete plan on how the shareholders of the weak company will not lose their holdings and ultimately how the company will regain its lost financial strength. A popular example of a bailout takeover was one in which the National City Corp encountered huge losses in 2008 and was eventually acquired by PNC Financial Services. About $5.2 billion of National Citys stock was purchased by PNC in order to acquire it. The acquisition was to bail the National City Corp out of potential bankruptcy. In a similar vein, the US government in 2008, took over Chrysler and General Motors to save it from potential bankruptcy. As part of the rehabilitation plans for the companies, the US government offered them a loan of $17.4 billion as a kickback loan.
Academic Research on Bailout Takeover
- Mergers and acquisitions analysis With the case study method, Agarwal, P., & Mittal, R. (2014). Mergers and acquisitions analysis With the case study method.International Journal of Management and Commerce Innovations,2(1), 236-244.
- Law and Practice of Takeovers in India-and Analysis, Mathias, S. (1995). Law and Practice of Takeovers in India-and Analysis.Student Advoc.,7, 55.
- Testing the Pecking Order, Method-of-Payment, Financial Slack, and Misvaluation Hypotheses for Tender Offers: Evidence from Japan, Yosano, T., & Shimada, Y. (2010). Testing the Pecking Order, Method-of-Payment, Financial Slack, and Misvaluation Hypotheses for Tender Offers: Evidence from Japan.Method-of-Payment, Financial Slack, and Misvaluation Hypotheses for Tender Offers: Evidence from Japan (September 29, 2010). In this paper, we investigated the affect of tender offer transactions in Japan from four perspectives. The first one is in regards to the Pecking Order Theory, and the second one concerns the Method-of-Payment Hypothesis. Both of these first two perspectives are related to manager payment method decisions, such as cash versus stocks. The third perspective is taken from the Financial Slack Hypothesis, which is very similar to the Free Cash Flow Hypothesis, and the last perspective takes into account the Misvaluation Hypothesis. These latter two perspectives are similarly related to the subsequent responses from investors that follow the announcements of tender offers . We found strong evidence supporting the Pecking Order Theory, because managers are deeply motivated to select cash payments when they have an extensive amount of financial slack, free cash flow, representative of cash or cash equivalent. Unfortunately, on the other hand, we could not find any empirical data to fully support the Method-of-Payment hypothesis which was originally introduced and supported empirically in the U.S.
- Cross-sectional Stock Returns on Fundamental Value vs. Market Value in Mergers and Acquisitions: Evidence from Japan, Yosano, T., & Shimada, Y. (2008).Cross-sectional Stock Returns on Fundamental Value vs. Market Value in Mergers and Acquisitions: Evidence from Japan(No. 2008-59). This study looks at the difference between the fundamental value and the market value of firms during the merger and acquisition process, and investigates the role of that difference on the method of payments (cash vs. stock) and on the subsequent stock performance around the merger and acquisition (M&A) announcement date. The number of M&A transactions has dramatically increased since the stock swap and stock transfer schemes were introduced in 1999. We investigate the scenario that managers who specialize in analyzing the corporate value of the firms possibly shorten the value correction time and partially reduce misvaluation in the capital market. The Means of Payment hypothesis suggests that the managers should choose stock payment over cash payment when the acquiror is over-valued in the market. However, we found that Japanese managers more positively use cash payment when the firm has sufficient financial slack (is cash rich). The Misvaluation hypothesis suggests that positive excess returns of the acquiror could be detected around the announcement day of M&A transactions, when the acquiror and/or the target is/are under-valued in the market. We found strong evidence which supports the Misvaluation hypothesis. In calculating the fundamental value of the firms, we employed the Residual Income Model, using financial analysts forecast value of future profits, after controlling the book-to-market ratio. We found strong evidence which supports the Misvaluation hypothesis. In particular, the hedging portfolio strategy supports the long position of the acquiring firms (M&A transactions are categorized as high acquirors valuationhigh targets valuation group) and simultaneously holds the short position of the acquiring firms (M&A transactions are conversely categorized as low acquirors valuationlow targets valuation group). This combination shows more persistent and more positive abnormal returns than the long position strategy of simply holding acquired stock after all M&A transactions. However, the simple long position strategy in Japan is still positive, when compared to the US.
- Market Reactions to Accounting Policy Choices for Mergers and Acquisitions: Evidence for the Japanese Adoption of International Accounting Standards, Yosano, T., & Shimada, Y. (2010). Market Reactions to Accounting Policy Choices for Mergers and Acquisitions: Evidence for the Japanese Adoption of International Accounting Standards.Available at SSRN 1689448. The purpose of this paper is to explore, through M&As accounting policies, whether the Japanese adoption of IFRS is favorable for market participants. M&As are excellent prototypes for this study, because they have a substantial impact upon firms financial statements. Additionally, Japanese M&A accounting standards still maintain the amortization period within twenty years, which is practical in creating a sharp contrast comparison with the impairment approach outlined by the IFRS 3 and SFAS141/142.