Busted Takeover Definition
A busted takeover is a type of takeover bid in which an acquirer purchases a target company and thereafter sells some of its assets. This takeover is highly leveraged because some of the assets of the purchased company are sold to settle or repay the debts used in financing the takeover.
A Little More on What is a Busted Takeover
Busted takeovers occur when an acquisition is financed through debts. This is when an acquiring company has insufficient cash to purchase a target firm and obtains a loan to execute the acquisition. Once the takeover is completed, some assets belonging to the purchased company are sold so that the acquirer can repay the debt.
Oftentimes, busted takeovers are used when a target company has a surplus of undervalued assets which are used as collateral when b obtaining a loan to finance the acquisition.
Acquirers who use busted takeovers are often strategic about the target companies they select. Given that the takeover is financed by a significant amount of debt, the target company must have enough undervalued assets.
Example of a Bust-Up Takeover
The acquisitive of Revlon in 1985 in a busted takeover remains a popular example of this type of takeover. Revlon then was acquired by Pantry Pride which used a significant number of junk bonds to finance the takeover. After the acquisition was complete, Pantry Pride sold some parts and assets of Revlon totaled about $1.4 billion.
Reference for “Bust-Up Takeover”
Academic research on “Bust-Up Takeover”
The Uncertain Case for Takeover Reform: An Essay on Stockholders, Stakeholders and Bust-Ups, Coffee Jr, J. C. (1988). The Uncertain Case for Takeover Reform: An Essay on Stockholders, Stakeholders and Bust-Ups. Wis. L. Rev., 435.
Takeover Responses and Directors’ Responsibilities—An Update, Lipton, M., & Brownstein, A. R. (1985). Takeover Responses and Directors’ Responsibilities—An Update. The Business Lawyer, 1403-1430. During the past several years, takeover battles have increased not only in number, but also in scope and intensity. Acquirors have devised new forms of attack that make virtually any corporation a potential target.Targets have employed novel and, to some, radical defensive strategies in response to actual and threatened attacks. Regulators, courts, corporate participants, and shareholders are reexamining the takeover process and the rules governing it. This article attempts to give an update on this continuously evolving area of law. Beginning with an overview of basic legal principles, focusing on the business judgment rule, the article proceeds to review current takeover methods, new defenses, and new federal and state regulatory responses.
The market for corporate control (including takeovers), Bittlingmayer, G. (1998). The market for corporate control (including takeovers). Available at SSRN 81808. Mergers, acquisitions and takeovers often imply dramatic changes for employees, competitors, customers and suppliers. Not surprisingly, the market for corporate control has generated controversy and is frequently regulated by law or business custom. Though transfers of control take place in many countries, explicit and public struggles for control occur most frequently in the U.S. and U.K. During most of the 20th century, critics of mergers and acquisitions in the U.S. pointed to the danger of monopoly and increased concentration. Partly in response to the emergence of new control transactions such as the hostile takeover and leveraged buyout, more recent criticism has focused on the consequences for corporate productivity, profitability and employee welfare. Subject to qualifications, the market for corporate control reallocates productive assets ? in the form of going concerns ? to the highest bidder. In cases where the bidder uses his own money or acts on behalf of the bidding firm1s shareholders, the asset goes to the highest value use. In cases where managers of the bidding firm are able to serve their own interests rather than the interests of shareholders, the market for corporate control plays a paradoxical role. It simultaneously provides (1) a means by which managers may acquire companies using other people’s money and (2) a means by which they may themselves be disciplined or displaced.
Can takeover losses explain spin-off gains?, Allen, J. W., Lummer, S. L., McConnell, J. J., & Reed, D. K. (1995). Can takeover losses explain spin-off gains?. Journal of Financial and Quantitative analysis, 30(4), 465-485. This paper evaluates the conjecture that excess stock returns that have been documented around the announcement of corporate spin-offs represent, at least in part, the re-creation of value destroyed at the time of an earlier acquisition. We evaluate this question with a sample of spin-offs that originated as earlier acquisitions. At the time of the original acquisition, on average, announcement period returns to the bidder and the combined bidder and target firm are negative and significant. Additionally, announcement period returns at the time of the spin-off are negatively and significantly correlated with acquisition announcement period returns.
Can stock markets predict M&A failure? A study of European transactions in the fifth takeover wave, Craninckx, K., & Huyghebaert, N. (2011). Can stock markets predict M&A failure? A study of European transactions in the fifth takeover wave. European Financial Management, 17(1), 9-45. In this paper we develop various measures of M&A failure for an intra‐European sample during the fifth takeover wave: inferior long‐term stock performance, inferior operating performance, and target divestment. After documenting the extent of M&A failure, we test the relation between short‐term abnormal returns at deal announcement and M&A failure. We examine a sample where listed bidders acquire listed targets (267 deals) as well as privately‐held targets (336 deals). Our results indicate M&A failure rates up to 50% in both samples. When acquirers and targets are listed, lower M&A announcement returns are consistently and significantly associated with higher M&A failure probabilities and long‐term losses. In contrast, when targets are privately held, we find no evidence of such an association.
The value of corporate takeovers, Mitchell, M. L. (1991). The value of corporate takeovers. Financial Analysts Journal, 47(1), 21-31.
Corporate diversification and shareholder value: a survey of recent literature, Martin, J. D., & Sayrak, A. (2003). Corporate diversification and shareholder value: a survey of recent literature. Journal of corporate finance, 9(1), 37-57. We survey the recent developments in the literature on corporate diversification. This literature is voluminous, diverse, and quite old. To make the task more manageable, we focus our attention on recent contributions to that subset of the diversification literature that is in our judgment most influential in setting the agenda for financial research. The study of diversification at the corporate level can be grouped into one of two bodies of literature: cross-sectional studies of the link between corporate diversification and firm value (i.e., the diversification discount) and longitudinal studies of patterns in corporate diversification through time. The prevailing wisdom among financial economists throughout much of the last decade has been that diversified firms sell at a discount and that the level of corporate diversification has been trending downward. However, recent research questions both these tenets and a number of studies now suggest that the diversification discount is either not due to diversification at all, or may be a result of improper measurement techniques. Furthermore, some researchers are now beginning to argue that previous attempts to assess changes in the levels of corporate diversification through time is also flawed as a result of biases built into the compustat database in combination with the use of noisy proxies for corporate diversification.