Hostile Takeover

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

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What is a Hostile Takeover?

Hostile Takeover

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.

Key Highlights

  • A hostile takeover is an offer to acquire a target company despite disapproval by that company’s board of directors.
  • The primary ways of conducting a hostile takeover are a tender offer and proxy battle.
  • Target companies may employ anti-takeover techniques like poison pills and golden parachutes.

An Overview of a 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 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.

Example of a Hostile Takeover

For example, Company A is looking to pursue an acquisition strategy and expand into a new geographical market.

  1. Company A approaches Company B with a bid offer to purchase Company B.
  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 attempted acquisition of Company B.

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.

Hostile Takeover Strategies

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

1. Tender offer

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.

2. Proxy vote

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.

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 the following:

  • Poison pill: Making the shares of the target company less attractive by allowing current shareholders of the target company to purchase new shares at a discount. This will dilute the acquirer’s equity interest on any shares it already owns of the target company, making it more difficult to acquire the other shares. The hope is that by making the acquisition more difficult, the would-be acquirer will abandon their takeover attempt.
  • Crown jewel defense: Selling the most valuable parts of the target company in the event of a hostile takeover attempt. This obviously makes the target company less desirable and deters a hostile takeover.
  • Supermajority amendment: An amendment to the company’s charter requiring a substantial majority (67%-90%) of the shares to vote to approve a merger.
  • Golden parachute: An employment contract that guarantees expensive benefits be paid to key management if they are removed from the company following a takeover. The idea here is, again, to make the acquisition prohibitively expensive.
  • Greenmail: The target company repurchases shares that the acquirer has already purchased at a higher premium in order 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; the target, Company B, then offers to purchase shares at $20 a share. Hopefully, it can repurchase enough shares to keep Company A from obtaining a controlling interest. Capturing this greenmail payment was often the goal of corporate raiders.
  • Pac-Man defense: The target company purchases shares of the acquiring company and attempts a takeover of its own. The acquirer will abandon its takeover attempt if it believes it is in danger of losing control of its own business. This strategy obviously requires Company B to have the funds to buy a lot of shares in Company A. Therefore, the Pac-Man defense usually isn’t workable for a small company with limited capital resources.

Real-life Examples of Hostile Takeover Attempts

There are several examples of hostile takeovers in real life, such as the following:

  • 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 the biotechnology company, Genzyme. Sanofi tendered more than $237 million worth of Genzyme shares, resulting in an equity ownership position of 90%.
  • AOL’s hostile takeover of Time Warner in 1999. Due to the dotcom bubble bursting, the new company lost over $200 billion in value within two years.

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