A hostile takeover is the acquisition of one company (the target) by another (the acquirer) conducted without the consent or cooperation of the target company’s management. This type of takeover contrasts with a friendly takeover, where both parties agree on the terms of the acquisition.
Mechanisms of a Hostile Takeover
Tender Offers
In a tender offer, the acquirer proposes to purchase shares from the target company’s shareholders at a premium over the current market price. The offer typically remains open for a specific period, providing shareholders an incentive to sell their shares.
Proxy Fights
A proxy fight involves persuading shareholders to vote out the target company’s existing management team in favor of directors who are sympathetic to the acquirer’s interests. This approach aims to replace the board with members favoring the takeover, thereby facilitating its acceptance.
Stock Purchases
The acquirer may also attempt to gain control by purchasing shares directly from the open market. By acquiring a significant portion of the target company’s shares, the acquirer can gain enough influence to push through the takeover, even against management’s wishes.
Strategies for Defending Against Hostile Takeovers
Poison Pills
A poison pill strategy makes the target company less attractive to the potential acquiror. For instance, existing shareholders can be allowed to purchase additional shares at a discount, diluting the value of shares and making the takeover more expensive.
White Knight
A white knight strategy involves finding another, more favorable company willing to acquire the target company. This acquisition is usually more acceptable to the target company’s management and shareholders.
Golden Parachutes
Golden parachutes provide significant financial benefits to executives if they are terminated after a takeover. This can deter potential acquirers by increasing the cost of the takeover.
Historical Context and Examples
Nabisco Takeover
One of the most famous hostile takeovers occurred in 1988, when RJR Nabisco was acquired by Kohlberg Kravis Roberts & Co. (KKR) for $25 billion. This leveraged buyout was highly publicized and remains one of the most significant examples of a hostile takeover.
InBev and Anheuser-Busch
In 2008, Belgian company InBev launched a hostile takeover of American beer giant Anheuser-Busch. After months of negotiation and resistance, the takeover was completed for approximately $52 billion.
Applicability in Business Strategy
Hostile takeovers can be effective for rapidly acquiring strategic assets or entering new markets. However, they are often contentious and can generate significant legal and financial challenges.
Comparing Hostile and Friendly Takeovers
Hostile Takeovers
- Initiated without target management consent.
- Often uses tender offers, proxy fights, and open market stock purchases.
- Can result in high legal and financial resistance.
Friendly Takeovers
- Agreed upon by both parties.
- Involves negotiated terms and mutual benefits.
- Generally smoother with less resistance.
Related Terms
- Mergers and Acquisitions (M&A): The general process of combining two companies, either through mergers (joining to form a new entity) or acquisitions (one company purchasing another).
- Leveraged Buyout (LBO): An acquisition strategy that involves financing the purchase using significant amounts of borrowed money.
- Shareholder Rights Plan: A defensive strategy to prevent hostile takeovers, allowing existing shareholders to purchase additional shares, thus diluting the potential acquiror’s stake.
FAQs
What is the main goal of a hostile takeover?
Why are hostile takeovers controversial?
Are hostile takeovers legal?
References
- Gaughan, Patrick. “Mergers, Acquisitions, and Corporate Restructurings,” Wiley, 2020.
- Weston, Fred, et al. “Mergers, Restructuring and Corporate Control,” Prentice Hall, 2004.
- SEC.gov, “Tender Offers,” Available at: https://www.sec.gov/fast-answers/answers-tender.htm
Summary
Hostile takeovers are a significant aspect of corporate strategy and financial markets. Understanding their mechanisms, strategies, and historical examples provides insight into the complex world of mergers and acquisitions. By examining the differences between hostile and friendly takeovers, businesses can strategize more effectively and prepare defensive measures to protect against unsolicited bids.
