A hostile takeover occurs when a business (referred to as the acquirer) buys
a target company by going directly to the target company's shareholders, either
by a tender offer or a proxy vote, in the context of mergers and acquisitions
(M&A). In a hostile takeover, the target company's board of directors does not
accept the deal, but in a friendly takeover, the target company's board of
directors does. When a buyer's offer to buy a company is turned down, there is a
chance the proposed takeover will become hostile.
Companies facing a hostile
takeover must employ the necessary defensive tactics to avoid unwanted sales.
Finance teams have the budgetary perspectives that the organization's
decision-makers depend on when heading offensive and defensive efforts in these
situations. Here is an in-depth look at both sides of hostile takeovers.
What is a hostile takeover of a company?
If the management or board of directors of the target company does not agree to
the deal, it is known as a hostile takeover. The acquirer goes directly to the
target company's shareholders to confirm the takeover due to a lack of consent
and cooperation from these decision-makers.
Aggressive takeovers are motivated by a number of factors
Mergers and acquisitions are common endeavours for businesses looking to expand
their operations, acquire new skills and resources, or reduce competition, as
well as those facing shareholder pressure to develop the company.
Targeted businesses that refuse acquisition offers sometimes do so because they
believe the bid is undervalued. Furthermore, the offer may fail to persuade them
of benefits that outweigh the benefits of operating as a stand-alone company.
The bidder's long-term ambitions and financial prospects are likely to be
questioned by executives and boards. Companies can also be wary of investors who
wish to make significant improvements to their brand name, operations,
strategies, or employees, according to Investopedia.
The process of fusion or acquisition can be divided into two portions. The first
section deals with the beginning of talks between the two firms (the
pre-transaction process). The transaction's execution and the start of the
implementation are the second sections (the post-transaction process). Both
aspects of the process are influenced by a variety of factors. Macroeconomic
conditions may have an effect regardless of the specific situation.
The advantages of hostile takeovers
According to the Financial Industry Regulatory Authority, hostile takeovers have
the potential to raise stock values for both acquirers and targets, even if the
original plan is unfavourable to the target business. Because of the target
company's properties, technology, and distribution power, the acquirer may be
interested in adding it to its established business.
The target company's shareholders may receive a premium over the current stock
price. Although the acquirer may end up paying more for the business by making a
direct offer to the shareholders against management's wishes, there have been
instances where hostile takeovers have benefited both companies. In the vast
majority of cases, hostile takeovers have obliterated value.
Additional advantages of purchasing a company include increased sales, increased
performance, and reduced competition. When acquired businesses continue to
operate, the combined sales result in higher net earnings results for both the
acquirer and the acquired.
Costs of hostile takeovers
The risk of declining stock and business value, as well as the higher cost of a
forced sale, are also disadvantages of acquisition. If employee redundancies
result in major layoffs and culture disruptions, company morale can suffer.
Leading a hostile takeover has the potential to damage an organization's image.
You hold a majority or controlling interest in a company if you own more than
500 shares. The shareholders must vote on significant decisions made by the
company. You get more votes if you have more shares. You always have a majority
of the votes if you own more than half of the shares.
There is a high cost involved, with the takeover price always proving to be too
high. Valuation problems (see the price too high, above) Customers and vendors
who are irritated, typically as a result of the disturbance. Integration issues
(change management), including employee resistance.
The offensive strategies
Various tactics and methods may be used to build an aggressive competitive
strategy on their own or as part of a coordinated effort. In certain cases,
companies may use completely different strategies in different locations or
markets. Consider how a multinational soft drink company might respond to a
competitor in its developed home market and how it might react to a start-up
competitor in a developing market. As a result of this heterogeneity, some
complex offensive strategies will emerge, as well as the inclusion of some
defensive strategies as part of an offensive effort.
When corporations aggressively seek to buy other companies in order to
accelerate growth or limit competition, this is the most intense offensive
strategic strategy. Since they are more likely to be completely invested or
leveraged, which may be troublesome in the event of a market recession or
dislocation, these companies are also viewed as higher risk than defensive
firms. All offensive tactics have one thing in common: they are costly.
When it comes to hostile takeovers, buyers have two options:Tender offer
When a buyer makes a tender offer, he or she tries to buy shares at a higher
price. For example, if the current market price of the company's stock is $10,
the acquirer might try to buy them for $15, a 50% premium. The buyer will be
able to obtain a majority stake in the targeted business if enough shareholders
agree to sell their shares.
Companies that use the tender offer approach must adhere to the rules outlined
in the Williams Act. The legislation, which was enacted in 1968, requires the
acquiring company to reveal the terms and intent of its bid, as well as the
source of funds and proposed plans if the acquisition is effective. It also
provides enough time for both the prospective buyer and the target company to
present their cases, as well as deadlines for shareholders to make their
Opposing stockholder groups pressure other stockholders to allow them to use
their shares' proxy votes in a proxy battle. A business that makes a hostile
takeover bid will use proxies to vote to approve the offer if it obtains enough.
Also known as a proxy vote or proxy contest, this strategy involves persuading
shareholders to support the sale. By doing so, the prospective buyer can then
convince those individuals to vote for board and executive member replacements
who are more likely to approve of the acquisition.
The defensive strategies
There are three possible situations in which a corporation tries to execute a
In the first, the targeted company engages in ineffective defensive action, and
the company is taken over. The targeted and attacking firms are combined in the
second example. A scenario like this arises when the boards of directors of two
firms decide to collaborate and develop a vision for a new economic system. The
threatened corporation is no longer able to protect itself, and the two firms
plan to merge. In the final case, a targeted corporation engages in defensive
action in order to prevent a hostile takeover by persuading existing
shareholders not to sell their stock. The final scenario assumes that the new
board's consolidation efforts have been approved by the current shareholders,
who are unable to change. By selling their shares, they will change the
The following are the most commonly used defensive strategies:Clauses in the articles of incorporation that must be present prior to a
The board is staggeredThe board is divided into three classes in this situation. Only one of them is
elected each year, preventing the immediate takeover of a corporation, even if a
controlling interest is purchased.
Supermajority To confirm an acquisition by another corporation, a qualified majority vote
(majority of more than 50%, e.g., 60%) is required.
A fair price This is a record requiring all companies pursuing takeovers to
pay shareholders at least the “fair price” described previously. A pricing
war in which a business agrees to equal or exceed a competitor's offer
- Increasing the number of features to stay ahead of a rival.
- Providing improved service or warranties that demonstrate superior
- Raise awareness of enhanced goods or services through increased
advertising and marketing
- Partnering with suppliers or retailers to keep rivals out or restrict
- Resisting a competitor's advance, such as when a competitor enters a
company's home market by entering their own
- The goal of an employee stock ownership program is to establish a
tax-qualified scheme that gives workers a larger stake in the business.
Employees are more likely to vote for management rather than a hostile
buyer, according to the theory.
- Poison pill Likely the most famous defense against hostile takeovers the
poison pill policy entails act such as taking on large loans with
high-interest rates that must be paid immediately in the event of a hostile
takeover or giving the company's board of directors’ large severance packages in the event of a
hostile takeover and personnel changes. It is known as the golden parachute.
On the basis of strategy, it is possible to observe that not every hostile
takeover attempt results in the acquisition of control over the attacked
company. The final effect is primarily determined by two factors: the actual
legal and economic situation on the market, as well as a resisting company's