Definition and Examples of Hostile Takeover
How Hostile Takeovers Work
Hostile Takeover vs. Friendly Takeover
How Companies Prevent Hostile Takeovers
What It Means for Individual Investors
Definition and Examples of Hostile Takeover
A hostile takeover occurs when one company acquires another without the approval of the target company’s management. In a traditional acquisition, the two companies work together to agree on a deal, and the target company’s board of directors approves the transaction. However, if the target company’s management is unwilling to sell, the acquiring company will go directly to the shareholders, typically through a tender offer to buy their shares at a premium price. When the acquiring company buys enough shares to obtain a controlling interest in the company, the hostile takeover is successful.
A notable example of a tender offer occurred in 2010 when the French biotech company Sanofi-Aventis made an offer to acquire the American biotech firm Genzyme. Genzyme’s management rejected the offer, so Sanofi went directly to the shareholders with its proposal. The acquisition was completed in 2011.
Hostile takeovers became common in the 1980s. During this decade, there were hundreds of unwanted takeover attempts, and companies lived in fear of such occurrences. This culture of hostile takeovers even affected the perception of business in America during those years.
Many states responded by implementing laws to prevent hostile takeovers. In 1987, the U.S. Supreme Court upheld such a law, and by 1988, 29 states had laws aimed at preventing hostile takeovers. Shareholder acquisition laws remained in effect in 25 states until 2020.
How Hostile Takeovers Work
A company might resort to a hostile takeover if the management of the target company is unwilling to accept acquisition offers. There are two main strategies that the company employs to carry out a hostile takeover: tender offer and proxy fight.
Tender Offer: When the acquiring company bypasses the management of the target company and makes an offer to purchase shares directly from shareholders, usually at a price higher than the current market value. Each shareholder decides for themselves whether to sell their stake in the company. The buyer’s goal is to acquire enough shares to obtain a controlling interest in the company. Tender offers are regulated by the Securities and Exchange Commission (SEC).
Proxy Fight: The aggressive buyer attempts to replace the board members of the target company. The goal is to secure enough board members who will agree to the sale.
Proxy voting has less success, as shareholders often vote with management, making it difficult to replace board members.
An example of a proxy fight occurred between Microsoft and Yahoo in 2008. Microsoft made a bid to acquire Yahoo, and Yahoo’s board rejected the offer, believing it undervalued the company. In response, Microsoft launched a proxy fight, attempting to nominate its own board members to Yahoo’s board. The acquisition ultimately failed when Microsoft abandoned its bid for Yahoo just a few months later.
Hostile Takeover vs. Friendly Takeover
A hostile takeover is the complete opposite of a friendly takeover, also known as a merger. In this type of acquisition, both the acquiring company and the target company agree to the deal. In the table below, we will review the similarities and differences between the two deals.
Similarities between Hostile Takeover and Friendly Takeover:
- Both combine two separate companies into one.
Differences between Hostile Takeover and Friendly Takeover:
- In a friendly takeover, the target company agrees to the acquisition, while in a hostile takeover, it does not.
- Both hostile and friendly takeovers can be positive or negative for individual shareholders. Hostile takeovers typically result in a bidding war, meaning the acquiring company pays a higher price per share compared to a friendly takeover.
How
Companies Prevent Hostile Takeovers
Many companies have implemented defensive strategies to help prevent hostile takeovers. These strategies, known as “poison pills” or shareholder rights plans, aim to make the acquisition more difficult and costly or less attractive to the aggressive buyer.
The most common type of poison pill is known as a shareholder rights plan, which is automatically triggered when an aggressive buyer acquires a certain percentage of the shares in the target company. Upon activation, these poison pills grant all shareholders except the aggressive buyer the right to purchase additional shares at a discounted price.
This action dilutes the aggressive buyer’s stake in the company by increasing the number of shares outstanding in the market. As a result, the acquisition becomes more costly.
Although poison pills are effective in preventing hostile takeovers, they can be detrimental to individual investors. They increase the number of shares outstanding in the market, leading to the dilution of all shareholders’ stakes and requiring investors to spend more money to maintain their current stake in the company.
What It Means for Individual Investors
As an investor, you may be affected by a hostile takeover. However, the exact impact depends on each case individually. First, a hostile takeover is not necessarily negative for shareholders. In fact, it can be positive by increasing stock prices for both the target and acquiring company. Since aggressive buyers often buy shares at a premium price, this type of deal can be profitable for you if you decide to sell your shares.
However, if you decide to hold onto your shares after the hostile takeover, there is no way to predict the long-term effect on the company’s performance or stock prices.
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Source: https://www.thebalancemoney.com/what-is-a-hostile-takeover-5185686
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