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What Is A Hostile Takeover
In business, a hostile takeover is a type of acquisition where the acquiring company acquires another company against its wishes.
The company moving forward with a hostile takeover strategy against another is called the “acquirer” whereas the company being purchased is called the target.
The term “hostile” is used in this type of acquisition strategy as the acquirer’s plan is to have the shareholders of the target company approve the acquisition by bypassing the target’s board of directors.
In other words, instead of convincing the target’s board of directors so they recommend to the shareholders that the acquisition will bring value to them, the acquiring company attempts to directly convince the shareholders.
In most cases, the shareholders will provide their approval for the hostile takeover in a tender offer, further into a proxy fight, or by purchasing the target’s shares on the market.
Let’s look at these more closely.
A tender offer is when the acquiring company offers to purchase the shares of the target company by paying the shareholders a premium over the current market value of the shares.
For example, if the target company’s shares trade at $50 per share, the acquiring company may offer $60 per share to shareholders.
If the shareholders accept the offer, they can earn $10 per share in premium or the equivalent of 20%.
A proxy fight is when the different stockholder groups attempt to convince other stockholder groups to use their stock proxy votes.
In other words, a proxy fight is a fight between two or more shareholder factions fighting to get enough proxy votes to accept or reject an offer.
If there are enough shareholders’ proxy votes, the acquirer’s offer may be accepted.
The proxy fight is also a strategy to replace the uncooperative members of the target’s board of directors.
Open Market Purchases of Shares
Another way for an acquiring company to take over a target without the target’s board approval is to buy the target’s shares on the open market.
Typically, this is a more costly acquisition strategy as the acquirer will have to publicly disclose its equity stake in the target when it reaches a certain threshold.
Then, once the market becomes aware that the acquirer is potentially moving for an acquisition, the shares will start trading at a premium making it more costly for the acquirer to purchase a controlling interest.
Hostile Takeover Definition
How do you define a hostile takeover?
A hostile takeover is a type of acquisition strategy where the acquiring company does not have approval from the target company’s board of directors for the acquisition.
In such cases, since the target company’s board of directors disapproves of the acquirer’s acquisition offer, the acquirer will try to complete the acquisition by targeting the target’s shareholders directly.
This can be done by issuing a tender offer, getting into a proxy fight, or buy buying the target company’s shares in the open market to eventually reach a controlling interest.
Hostile Takeover Objective
Why do some companies prefer to acquire another company via hostile takeover strategies rather than through a friendly acquisition approach?
Fundamentally, a company looking to acquire another company will do so if it considers that the acquisition will result in increased value for the acquirer.
For example, the acquirer may consider that the target company is undervalued by the market, there may be synergistic value to achieve, the target may have access to raw material, technology, or assets valuable to the acquirer, and so on.
In some situations, some investing groups may move with a hostile takeover of a company to ultimately replace the company’s management team to run the company more efficiently.
Hostile Takeovers Defenses
There are various strategies possible for the target company to defend itself against hostile takeover attempts.
Let’s look at the most common hostile takeover defense strategies.
Differential Voting Rights
One strategy that could be deployed is to establish different types of stock with different voting rights.
In this context, some types of shares will have more voting rights than other types of shares.
The target company’s management can retain most of the shares with the greater voting rights and sell shares to the open market bearing fewer voting rights.
This way, it will be much harder for an external investor to buy enough shares to achieve a controlling interest without convincing the company’s management team.
Another way a target can defend itself against a hostile takeover is to implement an Employee Stock Purchase Plan (ESOP) where shares are awarded to company employees.
Having many employees as shareholders may make it more difficult for external investors to convince them to vote against the target company’s management.
Typically, most employees will remain loyal to their company’s management team and vote based on the management team’s guidance.
A crown jewel is a more dramatic defense strategy against hostile takeovers.
Executing a crown jewel defense means that the target company will sell most of its valuable assets (its crown jewels) making the company less attractive for an acquisition.
This type of defense is typically considered a last line of defense as the target company is effectively taking a drastic measure that may be seen as detrimental to the business.
Board members have to exercise this type of strategy carefully as they have a fiduciary duty to always act in the best interest of the shareholders.
A poison pill is a type of defense against hostile takeover attempts where the target company offers its current shareholders additional shares at a discount.
Furthermore, the acquirer is excluded from the discount.
When the poison pill is deployed, the current shareholders will likely purchase the shares at a discount from the share’s current market value thereby diluting the company’s ownership.
The end result is that the acquirer’s cost of acquisition will significantly increase making the acquisition less attractive to the acquirer.
A Pac-Man defense is a type of defense where the target company attempts to take over the acquirer through a hostile takeover.
In other words, the target of the hostile takeover moves to take a controlling interest in the acquirer.
With this type of defense, the target’s objective is to fight back against the acquirer hoping that the acquirer backs away.
The target company’s management also hopes to stay in power should the acquisition go through, this way they can decide the future of the business.
A company may choose to implement a staggered board structure making it more difficult for an acquirer to successfully run a proxy fight.
Having a staggered board means that only a few members of the board can be replaced in each election every year.
As a result, an acquirer wanting to get into a proxy fight to remove the undesired board members may potentially have to fight for a much longer period making the acquisition more difficult to pull off.
Another way the target company can make a hostile takeover more costly for the acquirer is to offer its executive management team a golden parachute.
This means that the executive team will benefit from things like bonuses, severance pay, stock options, and other benefits, making it more costly to get rid of the target’s management team.
Hostile Takeover Examples
Let’s look at a few examples of hostile takeovers to better illustrate the concept.
In the year 2000, AOL announced that it was taking over Time Warner.
AOL and Time Warner
The AOL hostile takeover cost a whopping $164 billion.
Many called the transaction “the deal of the millennium”.
Sanofi Aventis and Genzyme
Another important hostile takeover was that of Sanofi-Aventis and Genzyme Corp for $24.5 billion in 2010.
Sanofi’s spent more than what it wanted before triggering a top-up option to assume control of over 90% of the target.
Nasdaq OMX, IntercontinentalExchange and NYSE Euronext
Another important hostile takeover example is that of Nasdaq OMX, IntercontinentalExchange and NYSE Euronext in 2011 for $13.4 billion.
Nasdaq ultimately withdrew its offer amid concerns from regulators.
Icahn Enterprises and Clorox
In 2011, Icahn Enterprises submitted a $10 billion offer to purchase the Clorox shares.
The Clorox board of directors refused.
Carl Icahn, Icahn Enterprises’s CEO, sent a full-caps letter to the Clorox board of directors telling them that the shareholders should decide.
Ultimately, after three takeover bids, Icahn gave up on its hostile takeover attempt.
Air Products & Chemicals and Airgas
This is an example of a hostile takeover attempt that ended up in court.
In essence, Airgas brought Air Products to court in Delaware to avoid the hostile takeover attempt as the price Air Products was offering did not reflect what the target considered to be a fair price.
Airgas ultimately lost in court.
Hostile Takeover FAQs
How does a hostile takeover work?
A hostile takeover is when a company, the acquirer, tries to purchase another company, the target, without the target’s board of directors’ approval.
In other words, a hostile takeover is when a company acquires another company by bypassing the target’s board and convincing the shareholders of the company to approve the acquisition.
What is an example of a hostile takeover?
A good example of a hostile takeover is that of Kraft Foods Inc and Cadbury PLC.
In September 2009, Kraft Foods submitted an initial takeover bid of $16.3 billion that Cadbury rejected.
Ultimately, after a lot of effort, Kraft Foods was able to acquire Cadbury for a total of $19.6 billion.
Are hostile takeovers legal?
Yes, hostile takeovers are legal.
The reason why it’s called a hostile takeover is that the acquirer is not looking to get the board of directors of the target to approve the transaction.
However, if the target company’s shareholders do not believe that the current management team is doing a good job or has not brought value to the business, they may approve the hostile takeover bid as a means to appeal against the current management team.
How do you fight against a hostile takeover?
There are different ways a target company can defend itself against hostile takeovers, such as:
- Creating securities with differential voting rights (DVRs)
- Issuing stock options to employees to have a more loyal shareholder base
- Triggering a poison pill makes it more costly or unattractive for the acquirer to pursue the acquisition
- Defending by going on the offense where the target submits a hostile takeover bid to the acquirer shareholders in a Pac-Man defense
There are many other defense strategies against hostile takeovers where the ultimate objective is for the target to dissuade the acquirer from moving forward with the deal.
So there you have it folks!
What does a hostile takeover mean?
In a nutshell, a hostile takeover in mergers and acquisitions is when a company goes directly to the shareholders of another company to get the necessary approval to complete the acquisition.
In this process, the acquirer does not seek to obtain the target’s board approval.
A hostile takeover can be executed by submitting a tender offer, getting into a proxy fight, or by purchasing shares of the target in the open market until a controlling interest is purchased.
Now that you know what is a hostile takeover and how it works, good luck with your research!
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