A bust-up takeover refers to a corporate buyout, where a target company sells its portion of activities or assets so that it can pay some of its debt that financed the initial takeover. The acquirer borrows money to purchase a company and then repays the debt using the business’ target assets once it takes control. This strategy is commonly used where the target firm has undervalued assets that the acquirer is interested in exploiting.
A Little More on What is a Bust-Up Takeover
In this style of a leveraged buyout, there is the borrowing of money to meet acquisition costs. The acquirer is expected to conduct an adequate in-depth analysis first before engaging in the purchase. It is important to do the assets valuation of the target company. It will help the acquirer to know whether the assets’ returns are capable of paying for the additional debt cost.
Note that if the target company’s undervalued assets are significant and the acquirer’s cash is little, it may need debt to facilitate the purchase. It means that the bust-up takeover will be key in unlocking the value.
How Bust -UP Takeover Works
Let’s assume that we have companies A, B, and C. A that is controlled by B is smaller than C. Company A, however, is interested in acquiring C using debt. It, therefore, plans to sell a portion of Company C, and also make use of junk bonds for financing, once it finalizes the acquisition. A is finally able to purchase C. After gaining its control, it sells part of company C’s assets, to settle the debt, it used to finance its acquisition.
Reference for “Bust-Up Takeover”
Academic research on “Bust-Up Takeover”
Deal size, acquisition premia and shareholder gains, Alexandridis, G., Fuller, K. P., Terhaar, L., & Travlos, N. G. (2013). Deal size, acquisition premia and shareholder gains. Journal of Corporate Finance, 20, 1-13. This study examines the contradictory predictions regarding the association between the premium paid in acquisitions and deal size. We document a robust negative relation between offer premia and target size, indicating that acquirers tend to pay less for large firms, not more. We also find that the overpayment potential is lower in acquisitions of large targets. Yet, they still destroy more value for acquirers around deal announcements, implying that target size may proxy, among others, for the unobserved complexity inherent in large deals. We provide evidence in favor of this interpretation.
Stock market reaction to sell-offs announcements: Canadian evidence, Francoeur, C., & Niyubahwe, A. (2009). Stock market reaction to sell-offs announcements: Canadian evidence. Available at SSRN 1489931. This study examines the effects of Canadian divestitures announcements on selling companies’ shareholder wealth. Using a non parametric bootstrap approach to test for significance, our results show that the sell-off announcement produces significant positive average abnormal returns of 0.92% over a two day announcement period. Gains arise predominantly from divestitures that focus firm’s activities. A cross sectional regression shows that private lender monitoring and focused operations have a positive and significant wealth effect on the divesting firms.
Financial distress and firm exit: determinants of involuntary exits, voluntary liquidations and restructuring exits, Balcaen, S., Buyze, J., & Ooghe, H. (2009). Financial distress and firm exit: determinants of involuntary exits, voluntary liquidations and restructuring exits. This paper provides new insights on the determinants of firm exit after distress. Using nested logit models and a sample of 6118 distress-related exits from Belgium, we analyze the impacts of available and potential slack and the relative efficiency of voluntary liquidation, compared to acquisition and merger, on the type of exit. It appears essential to examine the type of exit outcome as a two-stage process. The first stage considers the fundamental distinction between voluntary and involuntary exit, the latter being the least favorable and most avoided exit strategy. In this situation, high levels of available and potential slack resources, as reflected by large cash holdings, strong group relations and low current leverage, increase the probability of voluntary exit. High slack allows distressed firms to avoid bankruptcy and decide on their exit process. In the second stage, and provided that exit is voluntary, voluntary liquidation is compared to restructuring exit (acquisition, merger or split). In this stage, a higher relative efficiency of voluntary liquidation compared to a restructuring exit, as indicated by absence of group relations, small firm size, high secured debt level and large cash holdings, increase the likelihood of voluntary liquidation and reduce the probability of a restructuring exit.
An emerging market for corporate control? The Mannesmann takeover and German corporate governance, Jackson, G., & Hoepner, M. (2001). An emerging market for corporate control? The Mannesmann takeover and German corporate governance. Max-Planck-Institute for the Study of Societies, Discussion Paper, (01/4). In this essay, I analyzed changes in the law’s impact on the corporation during the past thirty-five years, what the underlying bases for these changes might have been, and how these changes affected corporate law. When the first Corporation and Modern Society symposium was held in 1959, today’s issues, such as competitiveness, were hardly apparent, and the issue of colossal corporate power was paramount. Antitrust law in particular was seen to be a means to restrain the large corporation.
Corporate diversification and firm performance: Evidence from Swedish acquisitions, Doukas, J. A., Travlos, N. G., & Holmen, M. (2001). Corporate diversification and firm performance: Evidence from Swedish acquisitions. Available at SSRN 250520. We study the short- and long-term valuation effects of Swedish takeovers. Using a sample of 93 bidding firms that acquired 101 targets between 1980 and 1995, we find that diversifying acquisitions lead to a negative market reaction and deterioration of the operating performance of the bidder. Our findings do not support the internal capital market hypothesis that postulates information asymmetries and market imperfections enhance the value of diversification. We find that the typical bidder is a growing firm while the target has a weaker performance than its industry competitors. Performance gains in each of the three years following the acquisition occur only when bidders expand their core business rather than diversify in peripheral lines of business. The announcement gains are also greater for firms that chose to expand their core lines of business. Our findings suggest that focused acquisitions lead to greater synergies and operating efficiencies than diversifying acquisitions. This implies that agency costs associated with diversification outweigh possible benefits arising from the creation of internal capital markets. Further, we find that concentrated ownership in the hands of insiders does mitigate the losses of diversifying bidders.