Recommended offer
Also known as: Agreed takeover, Friendly bid
A listed company bought with its own board's blessing — then a year of waiting for people outside the room.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
When one company wants to buy another listed company, it can do it with the other board's help or against it. With help is called a recommended offer. It is by far the most common kind.
The private part comes first. The buyer approaches the board, and the two sides work out whether a price exists that the board would tell its shareholders to accept. If it does, they agree everything quietly: the price, what happens to the staff, who runs it afterwards. Nobody outside a small group knows.
Then it becomes public, all at once, on one morning before the market opens. The offer, the board's recommendation, and the promises of support from big shareholders are all published together.
And then almost nothing happens for a long time. The shareholders vote. Competition authorities in every country the two firms operate in look at whether the deal is allowed. That can take a year. In that year the deal can still die, and the share price tells you every day how likely people think that is.
- 1
Approach2–8 wks
The bidder approaches the target's board privately and the two sides establish whether a price exists.
- 2
Confirmatory work3–6 wks
Limited diligence, the financing is committed and the offer documents are drafted under confidentiality.
- 3
Announcement1 day
The offer, the recommendation and the irrevocable undertakings are published before the market opens.
- 4
Documents and vote6–10 wks
Shareholders receive the offer or scheme document and either vote or accept.
- 5
Regulatory review3–12 mths
Competition authorities, foreign-investment screens and sector regulators work through the filings.
- 6
Completion1 day
The consideration is paid and the shares are cancelled or transferred.
Board recommendation — The target's board decides. Without it the same offer becomes a hostile bid and a different transaction entirely.
Put up or shut up — The takeover regulator decides. In several jurisdictions a named bidder must announce a firm offer or walk away within a fixed period.
Shareholder approval — The target's shareholders decides. A scheme typically needs a majority in number as well as a large majority in value, so many small holders can outvote a few large ones.
Clearance — The competition authority decides. Remedies that remove the reason for the deal are a refusal by another name.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The bidder | Buy side | Sets the price and bears the risk that the deal takes a year to clear. |
| The target's board | Sell side | Owes its duty to its own shareholders and has to say publicly whether the offer is one they should accept. |
| The financial advisers | Both | One on each side; the target's also delivers or arranges the opinion on whether the price is fair. |
| The takeover regulator | Neither | Enforces the timetable, the equality of information and the rules on what may be said while an offer is live. |
| The competition authority | Neither | Holds the only veto in the room that nobody can negotiate away. |
| The arbitrage funds | Neither | Buy the shares after announcement from holders who want certainty, and become the register that votes. |
| The financing banks | Buy side | Commit the cash consideration in writing months before it is needed. |
- Desk
- Mergers & Acquisitions
- What is bought
- A listed company, in whole
- Agreed with
- The target's board, before it is public
- Typical length
- Six to eighteen months from approach to completion
- Decided by
- Shareholders, then regulators
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricematters
- Financingmatters
- Approvaldecides it
- Diligencebarely applies
- Executionmatters
What decides it here. The price and the recommendation are settled before anybody hears about it, so what is left is a year of waiting for people outside the room. Competition authorities, foreign-investment screens and the shareholder vote are the whole of the remaining risk, and the share price says every day what the market thinks of it.
3 · IntermediateHow it runs in practice
Why the announcement is one document on one morning
Takeover rules in most markets treat information about an offer as capable of moving a share price, which means it has to reach everybody at the same time. Announcing while the market is open, or with only half the documents ready, creates a window in which some people know and others do not — and that window is what investigations are made of.
So the announcement carries the whole package: the price, the structure, the conditions, the board's recommendation, and the irrevocable undertakings already given by large shareholders and directors. Those undertakings are the reason a deal announced on Monday is usually already most of the way to its vote.
Offer or scheme
Two mechanisms deliver the same outcome and they behave differently:
- A contractual offer is made to shareholders individually. Whoever accepts is bought; whoever does not, is not. The bidder can end up with ninety per cent and a stubborn minority.
- A scheme of arrangement runs through a court and binds everybody once the statutory majorities are reached. It delivers the whole company or nothing, which is why a bidder wanting certainty prefers it.
What the register does after announcement
The shareholders who vote are frequently not the ones who owned the company the day before. Index funds and long-only holders sell into the announcement to lock in the premium; arbitrage funds buy, because their business is the spread between the offer and the market price. Those funds want completion at any price above where they bought, which makes the register more willing to vote yes and less willing to hold out for more.
The conditions are the transaction
- Regulatory conditions — merger control, foreign investment, sector approvals. Not negotiable away; the negotiation is about who bears the risk if one is refused.
- The minimum acceptance condition, on an offer, or the statutory majorities on a scheme.
- The long stop date — after which either side may walk away. This, not the announcement, is the date the market is discounting to.
- Material adverse change — a clause allowing the bidder out if something serious happens. In practice it is invoked very rarely and successfully more rarely still.
4 · AdvancedThe numbers & the documents
Reading the spread
Once an offer is announced, the target's shares stop trading on its business and start trading on the probability of completion. If the offer is a fixed cash amount, the discount to that amount is a combination of two things: how likely the deal is to fail, and how long the money is tied up before it arrives. Both are readable, and both move on news that has nothing to do with the company — a regulator opening a deeper review, a rival bid, an election in a country where a foreign-investment screen applies.
A share-for-share offer behaves differently again, because the value of the consideration moves with the bidder's own share price. What is fixed there is the exchange ratio, not the price.
Why the buyer's shares usually fall
On announcement the target rises towards the offer and the bidder frequently falls. Three mechanisms, all ordinary:
- The premium is a transfer. Paying more than the market price hands value to the target's shareholders unless the combination creates more than the premium.
- Synergies are a forecast made by the party that needs them to be true — see synergies — and the market discounts them accordingly.
- Index and arbitrage flow. In a share-for-share deal, arbitrage funds short the bidder to hedge, which is mechanical selling unrelated to any view.
The part nobody sees: completion accounts
On a listed takeover the price per share is fixed, so this applies mostly to the private deals on this desk — but the principle matters here too. What a buyer actually pays depends on the cash, the debt and the working capital in the business on the day it changes hands. Definitions of all three are negotiated in advance precisely because they move the money afterwards.
Where the risk actually sits
Between announcement and completion the buyer is exposed and cannot easily withdraw. It has committed financing that costs money to keep available. It has told its own shareholders what it will pay. And it is waiting on decisions taken by people with no interest in its timetable. This is the reason bidders pay for speed, accept remedies they dislike, and occasionally agree to pay a fee if a regulator says no — a reverse break fee, which is the market's honest price for that risk.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Recommended offer in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyMerger of equalsDealTwo comparable companies combining without one buying the other
- EasyWhat kills a dealAnalysisFive ways a transaction fails to happen, counted across every deal on the site — and the one that decides most of…
- MediumBridge to bondDealA loan that exists to be replaced
- MediumExchange ratioDealHow many buyer's shares each target share becomes
- MediumTender offerDealA price published to every shareholder at once