Hostile Bid

A form of takeover bid where the acquiring company presents a tender offer directly to the target company's shareholders

What is Hostile Bid?

A hostile bid is a type of takeover bid where the acquiring company presents a tender offer directly to the shareholders to buy their shares at a premium. The acquiring entity does not go through the board of directors because they rejected the offer or they are against the acquisition.

 

Hostile Bid

 

The tender offer is usually made public, and it invites shareholders to sell their common shares at a specified price and within a particular time frame. The price offered to shareholders is usually a premium to the current market price of the target company’s shares. It is pegged on the minimum or the maximum number of shares that shareholders are willing to sell.

Generally, the acquiring company presents the offer directly to shareholders of the target company because either the management rejected the offer or they are unwilling to consider the terms of the offer.

 

Summary

  • A hostile bid is a form of takeover bid where the acquiring company presents a tender offer directly to the target company’s shareholders.
  • The acquirer offers to buy common shares held by the target’s shareholders by offering a premium over the market price of the shares.
  • The acquirer presents the offer directly to the target’s shareholders, requesting to purchase their shares at a specific price and within a defined time frame.

 

Understanding Hostile Bids

When executing a hostile bid, the acquiring company may use several strategies to influence shareholders to vote in their favor during the shareholder’s meeting. Generally, when the acquirer makes a tender offer, it sends Schedule 14A to shareholders with the financial information and terms of the acquisition. For example, if the current price per share is $10, the acquirer may submit an offer of $13 per share on the condition that it acquires at least 51% of the shares to gain a controlling interest in the target company.

The acquirer can reach out to specific large shareholders or use an external solicitation firm to influence shareholder votes on its behalf. The solicitation firm is required to compile a list of shareholders and send them written information detailing the acquirer’s case for attempting to make changes in the target company and how the deal can potentially create more shareholder value in the long-term.

Individual shareholders then submit their votes to the stock transfer agent or brokerage that is tasked with aggregating the information. The information is then presented to the corporate secretary of the target company before the shareholders’ meeting. In most cases, the acquirer gains majority control of the target company in a month or less if the shareholders accept the offer and vote in the shareholders meeting in favor of the acquisition.

 

Reasons for a Hostile Bid

A company may attempt a hostile bid to acquire another company for several reasons.

The primary reason for a hostile bid is to acquire a target company that the acquirer believes is well priced and offers a greater potential to increase in value in the long-term.

The acquiring entity benefits from increased profits, reduced costs, economies of scale, and greater market share. Sometimes, the acquirer may get monopoly power by acquiring a small competitor with a strong industry position. As a monopoly, the company gains the upper hand in determining market prices and distribution networks.

A company can also pursue a hostile bid as a way of entering into a new market without the need to spend resources in setting up distribution logistics and industrial facilities. In such a case, the acquiring entity may attempt to acquire another competitor with an already established market presence in a specific market segment or geographical location.

By combining forces with the target company, the acquirer benefits from increased efficiency in the new markets without spending a lot of resources or taking too many risks. It also benefits from a wider ready market for its goods and services.

 

Hostile Bid vs. Friendly Bid

A hostile bid and a friendly bid differ on the approach that the acquiring entity uses to acquire the target company. In the case of a friendly bid, both the acquirer and the target company work together to negotiate favorable terms of the deal.

The acquirer starts by making an offer, which is reviewed and accepted by the management and board of directors of the target company. As a result, the acquirer has access to a large pool of information on the company’s performance and day-to-day operations.

On the contrary, a company pursuing a hostile bid goes directly to the target company’s shareholders because the management or board of directors is unwilling to negotiate the deal. The acquirer may issue a tender offer to the shareholders in a bid to buy enough shares in the open market to gain a controlling interest in the target company.

In response to the hostile takeover bid, the target company’s management may employ certain defensive tactics to thwart the takeover. Examples of defensive strategies available to management may include poison pills and a golden parachute.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Annual General Meeting (AGM)
  • Common vs Preferred Shares
  • Economies of Scope
  • Poison Pill

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