Hostile Takeover

A proposed acquisition without the approval or consent of the target company

What is a Hostile Takeover?

A hostile takeover, in mergers and acquisitions (M&A), is the acquisition of a company (called the target company) by the other company (called the acquirer) by going directly to the target company’s shareholders (a tender offer) or through a proxy vote. The difference between a hostile and friendly takeover is that in a hostile takeover, the target company’s board of directors do not approve of the transaction.


Hostile Takeover


Example of a Hostile Takeover

For example, Company A is looking to pursue a corporate-level strategy and expand into a new geographical market.

  1. Company A approaches Company B with a bid offer to purchase the company.
  2. The board of directors of Company B concludes that this would not be in the best interest of shareholders in Company B and rejects the bid offer.
  3. Despite seeing the bid offer denied, Company A continues to push for an acquisition attempt of Company B.


In the scenario above, despite the rejection of its bid, Company A is still attempting an acquisition of Company B. Therefore, this situation would be referred to as a hostile takeover attempt.


Hostile Takeover Strategies

There are two common hostile takeover strategies: tender offer or a proxy vote.


1. Tender offer

A tender offer is an offer to purchase shareholder’s shares in a company at a premium to the market price. For example, if Company B’s current market price of shares is $10, Company A could make a tender offer to purchase shares of company B at $15 (50% premium). The goal of a tender offer is to acquire enough shares for a majority stake in the target company.


2. Proxy vote

A proxy vote is the act of the acquirer company persuading existing shareholders to vote out the management 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 for changes to the company’s board of directors. The goal of a proxy vote is to remove the board members opposing the hostile takeover and to install new board members who are more receptive to change.


Defenses against a Hostile Takeover

There are several defenses that the management of the target company can employ to deter a hostile takeover. They include:

  • Poison pill: Making the stocks of the target company less attractive by allowing current shareholders of the target company purchase shares at a discount. It will increase the number of shares the acquirer company needs to obtain.
  • Crown jewels defense: Selling the most valuable parts of the company in the event of a hostile takeover. It will make the target company less attractive and deter a hostile takeover.
  • Supermajority amendment: A amendment to the company’s charter requiring a substantial majority (67%-90%) of the shares to approve a merger.
  • Golden parachute: An employment contract that guarantees extensive benefits to key management if they were removed from the company.
  • Greenmail: The target company repurchasing shares that the acquirer has already purchased a further premium to prevent the shares from being in the hands of the acquirer. For example, Company A purchases shares of Company B at a premium price of $15 and requiring Company B to repurchase those shares at a further premium or fake a hostile takeover.
  • Pac-Man defense: The target company purchasing shares of the acquiring company and attempting a takeover of their own.


Real-life Examples of Hostile Takeovers

There are several examples of hostile takeovers in real-life such as:

  • Private equity firm KKR’s leveraged buyout of RJR Nabisco in the late 1980s. Read more about this transaction in the book Barbarians at the Gate.
  • Air Products & Chemicals Inc.’s hostile takeover attempt of Airgas Inc. Airgas Inc deterred the hostile takeover through the use of a poison pill.
  • Sanofi-Aventis’s hostile takeover of biotechnology company Genzyme. Sanofi tendered more than 237 million of Genzyme shares, resulting in an ownership of 90%.
  • AOL’s hostile takeover of Time Warner in 1999. Due to the dotcom bubble burst, the new company lost over $200 billion in value within two years.


Related Readings

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