Hostile Takeover Bid

Acquisition of a target company, but one that takes place against the board of directors' consent

What is a Hostile Takeover Bid?

A hostile takeover bid is the acquisition of a target company, but one that takes place against the board of directors’ consent. Ideally, an entity interested in a publicly-traded company should seek approval from the respective company’s board of directors.

 

Hostile Takeover Bid

 

But if the board rejects the acquisition bid, the acquirer can choose to go behind the board’s back and employ devious tactics to acquire the company anyway.

 

Summary

  • A hostile takeover bid is an offer placed to acquire a company despite disapproval by that company’s board of directors. 
  • Hostile takeovers can only happen to public companies.
  • The primary techniques of conducting a hostile takeover are a proxy battle, tender offer, and stock purchase. 

 

An Overview of Hostile Takeover Bid

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 acquiring – 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 one of three strategies to gain control of the target company.

 

Hostile Takeover Strategies

 

Tender Offer

A tender offer is a proposal from the acquiring entity to purchase a considerable share of the target company at a fixed price. Often, the fixed price is much higher than the amount the company’s share would sell for on the market. The higher price serves as an incentive so that the shareholders can agree to sell their stock.

The tender bid is made formally, and it may highlight the specifications proposed by the acquirer. For example, the acquiring entity can choose to set a timeframe for the stocks’ purchase. Once the window closes, they may resort to other measures to acquire the company.

The acquiring company is required to file acquisition documents with the Securities and Exchange Commission (SEC). They must also explain their objectives for the target company – an aspect that helps the target company make a final decision.

An example of an acquirer that employed the tender offer tactic is Sanofi. Back in 2010, Sanofi was trying to acquire Genzyme, a biotech company. To succeed, they ended up offering a substantial amount of money for the company’s shares.

While it sounds easy, a tender offer is one of the more difficult takeover strategies. Most companies put measures in place to protect their ventures from such a takeover. For this reason, the acquiring entities often resort to a proxy fight.

 

Proxy Fight

Also known as a proxy battle, a proxy fight is another strategy for taking over a company’s operations. It involves removing board members who do not support the acquisition bid and replacing them with new members who would.

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. If they are convinced, they will permit the acquiring entity to vote their shares by proxy.

If the proxy fight is a success,  the company can appoint new board members. Usually, the acquirer will propose members who will vote in favor of the acquisition.

 

Purchasing Shares

If neither the proxy fight nor the tender offer work, the last solution for an acquirer is to gain a controlling share of the target company’s stock. It entails purchasing a considerable number of shares in the open market.

The more shares the acquiring entity has, the more say they have in the decision-making process. For instance, if the acquirer has three-quarters of the company’s shares, it means they always have the highest number of votes; hence, a great deal of control.

 

The Bottom Line

An acquisition refers to how a company purchases, sells, and recombines its business ventures. The concept is the reason why the business landscape is filled with conglomerates.

You will find insurance companies running restaurants and hotels, shopping centers being part of manufacturing associations, and so much more. However, an acquisition may not always happen peacefully. A hostile takeover bid represents an offer made to acquire a target company in an aggressive manner.

In other words, the target company does not wish to be purchased, but the acquirer finds means to buy the company regardless. There are three main hostile-takeover strategies that an acquiring company can use – making a tender offer, a proxy fight, and purchasing shares to gain greater control.

 

More Resources

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 CFI resources below will be useful:

  • Tender Offer
  • Proxy Fight
  • Mergers & Acquisitions (M&A)
  • Poison Pill

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