What are Friendly Takeovers vs Hostile Takeovers?
In mergers and acquisitions, there is often confusion between friendly takeovers vs hostile takeovers. What differentiates between the two?
The difference between a friendly and hostile takeover resides in the manner in which the company is taken over by. In a friendly takeover, the target company’s management and board of directors approve the takeover proposal. However, in a hostile takeover, the management and board of directors of the target company do not approve the takeover proposal.
Depending on whether the takeover is friendly or hostile, the acquirer company employs different takeover strategies. They will be discussed in more detail below. First, we must understand how takeovers work and why they happen.
What is a Takeover and Why Do Takeovers Happen?
A takeover is the purchase of a company (the target) by another company (the acquirer or bidder). Whether the takeover is friendly or hostile, the resulting transaction results in the merging of two companies into one. A takeover happens for several reasons, including:
1. To realize operational efficiencies and economies of scale
By creating a larger company through the merger of two smaller companies, the resulting company is able to realize operational efficiencies and economies of scale (assuming that they operate in a similar industry and/or use similar resources).
2. To eliminate competition
Takeovers can be used to eliminate smaller companies that compete with the bidder. Instead of competing with the target company to acquire market share, the bidder can simply take over the target company to eliminate competition.
3. To acquire a company in a unique niche market
A takeover may happen when the bidder wants to acquire proprietary technology that the target company owns. It is the case when the bidder lacks a strong research and development (R&D) team or does not want to waste time and resources developing new technology.
For example, a data management company may want to take over a target company that possesses proprietary AI technology so that it can incorporate the AI technology with its data management platform instead of spending resources and time to develop its own AI technology.
4. Empire building by management
Takeovers may happen due to management wanting to “empire build.” It is the act of increasing the size, scope, and influence of a company through acquiring other companies. Empire building as a business rationale for a takeover is typically unwelcomed by shareholders of the bidder company as it may indicate that the management team is more concerned with resource control rather than efficiently allocating resources.
If the bidder company is acquiring companies in unrelated industries, it would increase the business risk of the company. Empire building as a business rationale for takeovers may not ultimately benefit shareholders.
The Takeover Process
A takeover starts with a proposal by the acquirer company to take over the target company. The proposal must be filed with the relevant regulatory bodies in which the companies reside.
Next, the target company’s board of directors can approve the proposal and advise shareholders to vote in favor of the takeover (friendly takeover) or reject the proposal and advise shareholders to vote against the takeover (hostile takeover). The acquirer company employs different strategies depending on whether the board approves or rejects the takeover.
Friendly Takeovers and Strategies Employed
In a friendly takeover, the management and board of directors approve of the takeover and advises shareholders to vote in favor of the deal. The acquirer company, in a friendly takeover, can employ strategies such as:
1. Offering their own shares or cash
For example, the acquirer company can offer a share conversion (x shares of the acquirer company for each share of the target company) or cash offer ($x per share of the target company). A combination of acquirer company shares + cash can also be used.
2. Offering a share price premium
For example, the acquirer company can offer a percentage premium to the most recent closing share price of the target company (x% premium to the closing share price).
Hostile Takeovers and Strategies Employed
In a hostile takeover, the management and board of directors reject the takeover and advises shareholders to vote against the takeover. The acquirer company, in a hostile takeover, can employ strategies such as a:
1. Tender offer
A tender offer is a direct offer to shareholders to purchase their shares at a premium to the market price of shares.
For example, if the target company’s share price is $20, the acquirer company could make a tender offer to purchase shares of the target company at $30 (a 50% premium). The rationale behind a tender offer is to acquire enough shares to reach a majority stake in the target company.
2. Proxy fight
A proxy fight is where the acquirer company persuades shareholders of the target company to band together and vote out the board of directors.
For example, the acquirer company can reach out to shareholders of the target company to vote out certain directors during the annual general meeting (AGM) and reinstall a new board. The rationale behind a proxy fight is to replace the current board of directors with a new board that is more receptive to a takeover by the acquirer company.
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