A proposed acquisition without the approval or consent of the target company
In mergers and acquisitions (M&A), a hostile takeover is the acquisition of a target company by an acquiring company that goes directly to the target company’s shareholders, either by making a tender offer or through a proxy vote.
Basically, a hostile takeover bid is the attempted acquisition of a target company, but one that takes place without the consent of the target company’s board of directors.
Ideally, an entity interested in acquiring a company should seek approval from the target company’s board of directors. The difference between a hostile and a friendly takeover is that, in a friendly takeover, the target company’s board of directors approve of the transaction and recommend shareholders vote in favor of the deal.
A hostile takeover bid entails an unwanted acquisition offer that is made by one business or entity to another. Most mergers and acquisitions happen under friendly terms. Usually, the boards of directors of both companies – the target and acquirer – meet and agree on the conditions of the acquisition.
However, in some cases, either party may disagree with the terms proposed for the acquisition. Such a disagreement can cause the acquiring company to resort to a hostile takeover. As explained below, the acquiring company can use a couple different strategies to gain control of the target company.
For example, Company A is looking to pursue an acquisition strategy and expand into a new geographical market.
In the scenario above, despite the rejection of its bid, Company A is still attempting an acquisition of Company B. This situation would then be referred to as a hostile takeover attempt.
There are two commonly used hostile takeover strategies: a tender offer or a proxy vote.
A tender offer is an offer to purchase shares from Company B shareholders at a premium to the market price. For example, if Company B’s current share price is $10, Company A could make a tender offer to purchase shares of Company B at $15 (a 50% premium). The higher price serves as an incentive for the shareholders to agree to sell their stock.
The goal of a tender offer is to acquire enough voting shares to have a controlling equity interest in the target company. Ordinarily, this means the acquirer needs to own more than 50% of the voting stock. In fact, most tender offers are made conditional on the acquirer being able to obtain a specified amount of shares. If not enough shareholders are willing to sell their stock to Company A to provide it with a controlling interest, then it will cancel its $15 per share tender offer.
Additionally, a tender offer will usually have a set timeframe before it expires. Once the window closes, the acquiring company may resort to other measures to acquire the target company.
The acquirer is usually required to file acquisition documents with various organizations, like the U.S. Securities and Exchange Commission (SEC). The acquirer must also explain its objectives for the target company, which helps selling shareholders make a final decision.
A proxy vote, also known as a proxy fight, is when the acquiring company tries to persuade existing shareholders to vote out the board of directors of the target company so it will be easier to take over.
For example, Company A could persuade shareholders of Company B to use their proxy votes to make changes to the company’s board of directors. The goal of such a proxy vote is to remove the board members opposing the takeover and to install new board members who are more receptive to a change in ownership and who, therefore, will vote to approve the takeover.
For a proxy fight to be successful, the acquiring entity must persuade the current shareholders that a change in management is necessary.
The acquiring company can achieve this by pinpointing faults in the present administration. For instance, if the company has underperforming assets or faces a financial crisis, the shareholders may support the idea of a change. If the target shareholders are convinced, they will vote out the current board of directors.
There are several defenses that the management of the target company can employ to deter a hostile takeover. They include the following:
There are several examples of hostile takeovers in real life, such as the following:
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CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
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A well rounded financial analyst possesses all of the above skills!
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In order to become a great financial analyst, here are some more questions and answers for you to discover: