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How does a corporate takeover work?

When one company decides to buy another, that's a takeover.

If the management, board of directors or a group of shareholders of the target firm decide they don't want to be taken over, it's called a hostile takeover bid. An unexpected takeover bid is also considered to be a hostile takeover bid. Often, the company planning a takeover and the target will agree beforehand, in a "friendly" deal. Takeover offers go to the board of directors of the target company, who may form a committee to study the offer. The committee will generally hire an investment dealer to give an opinion on whether it's a reasonable bid. The directors have an obligation to act in the best interest of shareholders. If it's a good offer, they would recommend shareholders accept it. A company's takeover bid will typically seek at least two-thirds of the target firm's outstanding shares. After purchasing most of the shares, the buying company may be able to use a legal process to get control of the rest of the shares. Once a bid is made, the target company usually has 21 days to make a decision on the offer. However, a company which is a takeover target may have a shareholder rights plan which allows extra time to decide. A shareholder rights plan, commonly known as a poison pill, is the way a company defends itself against a hostile takeover. By creating a longer acceptance period, for example, the target company has more time to study the offer, to hold out for more money or to look for a better offer from another bidder. As the expiration date for an offer draws near, the share price of the target company will generally ease downward, to close to the offer price, unless a competing bid is expected. But even if the share price remains higher than the initial bidder's price, that doesn't mean the original bidder would necessarily increase its first bid. There may be little reason to increase the first bid if no competing bids are made.