Hostile takeovers explained
Why do hostile takeovers occur?
Most hostile takeovers happen because the target company’s shares are undervalued or because its controlling shareholders want the business to go in a different direction. A shareholder or group of shareholders with a controlling interest owns more than 50% of a company’s stock. The shareholders of a company vote on major decisions made by that company, such as whether to sell to a particular buyer. The direction the company takes can be decided by those with the most votes.
One reason hostile takeovers may be appealing to an acquiring company is that they can occasionally be quicker and simpler than conventional acquisitions. Companies or investors frequently decide to buy other businesses because they believe they can turn a profit from doing so. They might choose a company they believe has a lot of potential or that they believe would benefit from new leadership.
What is a hostile takeover?
Hostile takeovers are a type of acquisition. An acquisition occurs when one business buys the entire asset portfolio of another, including the latter’s brand, personnel, intellectual property, and machinery. However, hostile takeovers are different from traditional acquisitions because the acquiring company does not have the cooperation of the target, or acquired, company. These takeovers only apply to publicly traded companies. In a typical hostile takeover, the acquiring company may speak with the target company’s shareholders directly, attempt to remove their executive team, or purchase multiple shares from each shareholder at once.
How do hostile takeovers happen?
There are a few methods for businesses to conduct hostile takeovers. Here are some commonly used strategies:
Issuing a tender offer
When an investor, or group of investors, makes an offer to buy the stock of a company, the price is typically higher than the market value. The target company’s board of directors may reject the offer, but if certain shareholders hold a majority stake in the business, the acquiring company can negotiate directly with those shareholders. These offers may be attractive to shareholders as they result in greater payouts than if they sold their stocks on the open market.
Typically, tender offers come with conditions. The investing company or person might reserve the right to offer the premium price only in exchange for a certain number of shares. The acquiring entity can take control of the target company by purchasing 50% of the outstanding shares of the company. To prevent unlawful practices, these offers are subject to predetermined rules and guidelines.
Purchasing stock
An acquiring company can also buy a company’s stock on the open market for its market value instead of requiring the consent of the required number of shareholders. This approach, also known as a creeping tender offer, functions similarly to a tender offer. However, investors can acquire control of the company without adhering to the federally imposed rules of tender offers by approaching shareholders without making a public offer. Buying stock can be a risky strategy because the target company might learn about the investor’s actions and devise tactics to discourage the buyer.
Engaging in a proxy contest
A proxy contest is the last strategy that businesses and investors can use to engage in a hostile takeover. When one group of stockholders uses another group’s proxy votes to win a corporate vote, this is known as a proxy contest or proxy fight. When one shareholder gives another shareholder the authority to vote on their behalf, this is known as a proxy vote. Acquiring entities can defeat those who might oppose their takeover of the company with the majority of the votes.
How can companies prevent a hostile takeover?
Companies can use many strategies to prevent hostile takeovers. Here’s a closer look at some strategies they can use to maintain their companies’ direction and level of control:
Use differential voting rights (DVRs)
Differential voting rights (DVRs) refer to a strategy in which the shares of a company have particular advantages. For instance, the business might increase dividends to stockholders with fewer voting rights, making the shares more desirable financially while also reducing the shareholder’s ability to make decisions. Because an acquiring company might have to work harder to secure the votes necessary to take control of the company, this can help businesses protect themselves from hostile takeovers.
Create a shareholder rights plan
Companies can also prevent unwanted acquisitions by allowing current shareholders to purchase stock at a discount. This can help dilute a would-be acquirers ownership interest. The acquiring investor or company may feel discouraged because they can’t buy the stocks at the discounted price. By making the target company a less appealing alternative, the business may not face as many market threats.
Establish employee stock purchasing options
Allowing employees to buy stock is another way for businesses to prevent hostile takeovers. This is desirable for businesses defending themselves against an acquisition because it can foster employees’ vested interests in the success of the company and the current management.
When a company is acquired or taken over, new leadership may occasionally replace existing employees. Employees who have stock options can vote to support their current management in order to keep their jobs, making it difficult for an acquiring company to secure the necessary support for a takeover. The fact that employee stock ownership plans (ESOPs) are tax-qualified is an additional advantage of this strategy.
Hostile vs. friendly takeovers
The difference between hostile and friendly takeovers is that during a friendly takeover, the target company consents to the acquiring company’s actions. In essence, friendly takeovers are just acquisitions in which the board of directors collaborates with the new management team on a partnered sale. This is distinct from a hostile takeover because in a hostile takeover, corporate leaders object to the acquisition and refuse to assist with its implementation.
FAQ
What happens in a hostile takeover?
When an acquiring company approaches the shareholders of the target company with an offer, but the target company’s board of directors rejects the takeover, it is known as a hostile takeover. In parallel, the acquirer typically employs strategies to remove the target company’s management or board of directors.
How do you avoid hostile takeover?
Target companies may decide to try and takeover themselves in order to avoid a hostile takeover by purchasing stock in the potential buyer’s business. The Pac-Man defense as a countermeasure functions best when the companies are of comparable size. Positives: Changing the situation puts the initial purchaser in a bad position.
What is the legal definition of a hostile takeover?
An attempt to acquire a controlling interest in a company without the target company’s board of directors’ approval, or else carrying on with shareholder negotiations after the board of directors rejects the bid
Who is considered hostile in a hostile takeover?
A hostile takeover happens when a business or individual tries to take over another business against the management of the target business. That is the “hostile” component of a hostile takeover: joining forces with or purchasing a company without the board of directors’ approval.
