In an acquisition, or takeover, a target company agrees to be purchased and becomes part of an acquiring company. A hostile takeover, however, is an unsolicited acquisition of a company in which the acquirer makes an offer directly to the company shareholders without the approval of the board of directors, or moves to replace the management.
Full Answer
What is 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.
What is a takeover?
Takeover A takeover is a transaction where the bidder company acquires the target company with or without the management's mutual agreement. Typically, a larger company expresses an interest to acquire a smaller company.
What happens in a proxy fight for hostile takeover?
In a proxy fight, opposing groups of stockholders persuade other stockholders to allow them to use their shares' proxy votes. If a company that makes a hostile takeover bid acquires enough proxies, it can use them to vote to accept the offer.
What is a hostile offer in a proxy contest?
The targeted offer is termed as hostile when the bidder deliberately chooses not to inform the target company about the unsolicited offer. Naturally, in such a scenario, a proxy contest will also be considered unamicable by the existing management.
What are the two common hostile takeover strategies?
There are two commonly-used hostile takeover strategies: a tender offer or a proxy vote.
What is the difference between hostile and friendly takeover?
The difference between a hostile and a friendly takeover is that, in a hostile takeover, the target company’s board of directors. Corporate Structure Corporate structure refers to the organization of different departments or business units within a company. Depending on a company’s goals and the industry. do not approve of the transaction.
What is Pac-Man Defense?
Pac-Man Defense The Pac-Man Defense is a strategy used by targeted companies to prevent a hostile takeover. This takeover prevention strategy is implemented by the target company turning things around by trying to take over the acquirer.
How Is a Hostile Takeover Done?
A hostile takeover takes place when one entity tries to acquire a publicly-traded company without any consent or cooperation from the target's board of directors.
What are the two methods of achieving a hostile takeover?
A tender offer and a proxy fight are two methods in achieving a hostile takeover. Target companies can use certain defenses, such as the poison pill or a golden parachute, to ward off hostile takeovers. 1:41.
What Are Other Defenses to a Hostile Takeover?
Companies can use the crown-jewel defense, golden parachute, and the Pac-Man defense to defend themselves against hostile takeovers.
What is proxy fight?
In a proxy fight, opposing groups of stockholders persuade other stockholders to allow them to use their shares' proxy votes. If a company that makes a hostile takeover bid acquires enough proxies, it can use them to vote to accept the offer.
Why do hostile takeovers happen?
Hostile takeovers may take place if a company believes a target is undervalued or when activist shareholders want changes in a company.
What is the best way to defend against hostile takeovers?
Sometimes a company's management will defend against unwanted hostile takeovers by using several controversial strategies, such as the people poison pill, a golden parachute, or the Pac-Man defense.
How to protect against hostile takeovers?
To protect against hostile takeovers, a company can establish stocks with differential voting rights (DVR), where a stock with less voting rights pays a higher dividend. This makes shares with a lower voting power an attractive investment while making it more difficult to generate the votes needed for a hostile takeover if management owns a large enough portion of shares with more voting power. Another defense is to establish an employee stock ownership program (ESOP), which is a tax-qualified plan in which employees own a substantial interest in the company. Employees may be more likely to vote with management, which is why this can be a successful defense. In a crown jewel defense, a provision of the company's bylaws requires the sale of the most valuable assets if there is a hostile takeover, thereby making it less attractive as a takeover opportunity.
What is hostile takeover?
A hostile takeover is a kind of acquisition by the target company by another company referred to as an acquiring company, where even though the target company’s management is not in the favor of the acquisition but still the bidder uses other channels to acquire the company such as acquiring the company through tender offer by directly make offer to the public to buy the shares of target company at the pre-specified price which is more than the prevailing market prices.
What happens when a company drops its decision for a hostile takeover?
Later on, when the acquiring company drops its decision for a hostile takeover, the target company again buys back its assets from the White Knight at a predetermined price.
What happens to the share price when a hostile takeover is made?
The share price increases follow a rather convoluted path in the share repurchase process. Even if the Hostile takeovers are eventually made, these involve management to make certain offers that are friendly for the shareholders. Usually, these offers are made so that the shareholders reject the hostile takeover bid.
How does hostile takeover affect the economy?
However, some analysts opine that hostile takeovers have an adverse effect on the overall economy. When one company takes over another one by force, the management may have limited or no understanding of the business model of the target company, their work culture, or technology.
Why is the expansion of macaroni when cooked an allegory?
The expansion of macaroni when cooked has been used as an allegory to depict that redemption of bonds at higher prices increases the cost of the hostile takeover. It is actually a tough nut to crack for a potential buyer when the redemption price of bond increases.
What is macaroni defense?
On a more technical front, a macaroni defense entails a company issuing many bonds with the situation that they must be redeemed at a high price if the company is taken over. When the bonds of a company are redeemed at an excessively higher price, the deal seems economically unappealing.
What is proxy battle?
Proxy Battle, on the other hand, is a rather unfriendly fight of control over an organization.
What is hostile takeover?
Hostile takeovers can only happen to public companies. The primary techniques of conducting a hostile takeover are a proxy battle, tender offer, and stock purchase.
What are the primary techniques of conducting a hostile takeover?
The primary techniques of conducting a hostile takeover are a proxy battle, tender offer, and stock purchase.
What is an acquirer that uses tender offer tactic?
An example of an acquirer that employed the tender offer tactic is Sanofi. Back in 2010, Sanofi was trying to acquire Genzyme, a biotech company. To succeed, they ended up offering a substantial amount of money for the company’s shares.
What is the last solution for an acquirer?
If neither the proxy fight nor the tender offer work, the last solution for an acquirer is to gain a controlling share of the target company’s stock. It entails purchasing a considerable number of shares in the open market.
What happens if the board rejects an acquisition bid?
But if the board rejects the acquisition bid, the acquirer can choose to go behind the board’s back and employ devious tactics to acquire the company anyway.
What is proxy fight?
Proxy Fight. Also known as a proxy battle, a proxy fight is another strategy for taking over a company’s operations. It involves removing board members who do not support the acquisition bid and replacing them with new members who would.
What is an acquisition?
An acquisition refers to how a company purchases, sells, and recombines its business ventures. The concept is the reason why the business landscape is filled with conglomerates ConglomerateA conglomerate is one very large corporation or company, composed of several combined companies, that is formed by either takeovers or mergers. In most cases, a conglomerate supplies a variety of goods and services that are not necessarily related to one another..
Example of A Hostile Takeover
For example, Company A is looking to pursue a corporate-level strategy and expand into a new geographical market. 1. Company A approaches Company B with a bid offer to purchase Company B. 2. The board of directors of Company B concludes that this would not be in the best interest of shareholders in Company …
Defenses Against A Hostile Takeover
- There are several defenses that the management of the target company can employ to deter a hostile takeover. They include the following: 1. Poison pill:Making the stocks of the target company less attractive by allowing current shareholders of the target company to purchase new shares at a discount. This will dilute the equity interest represented by each share and, thus, incr…
Real-Life Examples of Hostile Takeovers
- There are several examples of hostile takeovers in real-life, such as the following: 1. Private equity firm KKR’s leveraged buyout of RJR Nabisco in the late 1980s. Read more about this transaction in the book, “Barbarians at the Gate.” 2. Air Products & Chemicals Inc.’s hostile takeover attempt of Airgas Inc. Airgas Inc deterred the hostile takeover through the use of a poison pill. 3. Sanofi-…
Related Readings
- CFI is a global provider of financial analyst trainingand career advancement for finance professionals. To learn more and expand your career, explore the additional relevant CFI resources below: 1. Creeping Takeover 2. Non-Controlling Interest 3. White Squire 4. Black Knight
What Is A Hostile Takeover?
The term hostile takeover refers to the acquisition of one company by another corporation against the wishes of the former. The company being acquired in a hostile takeover is called the target company while the one executing the takeover is called the acquirer. In a hostile takeover, the acquirer goes directly to the comp…
Understanding Hostile Takeovers
- Factors playing into a hostile takeover from the acquisition side often coincide with those of any other takeover, such as believing that a company may be significantly undervalued or wanting access to a company's brand, operations, technology, or industry foothold. Hostile takeovers may also be strategic moves by activist investorslooking to effect change on a company's operations…
Defending Against A Hostile Takeover
- To deter the unwanted takeover, the target company's management may have preemptive defenses in place, or it may employ reactive defenses to fight back.
Hostile Takeover Examples
- A hostile takeover can be a difficult and lengthy process and attempts often end up unsuccessful. For example, billionaire activist investor Carl Icahn attempted three separate bids to acquire household goods giant Clorox in 2011, which rejected each one and introduced a new shareholder rights plan in its defense.3The Clorox board even sidelined Icahn's proxy fight efforts, and the att…
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