What Is a Hostile Takeover?

“Hostile takeover” refers to a firm acquired by another against its desires. A hostile takeover involves a target firm and an acquirer. A hostile takeover involves the buyer personally addressing shareholders or challenging management to get approval. Tender offers or proxy fights usually approve aggressive takeovers.

Understanding hostile takeovers

Acquisition factors often drive hostile takeovers, including a belief in undervaluation or a desire for a company’s brand, operations, technology, or industry position. Hostile takeovers may be deliberate maneuvers by activist investors seeking to influence a company’s operations.

In a hostile takeover, target management opposes the agreement. This sort of offer involves attempting to acquire control of a company without the board’s agreement or participation. Without the target company’s board permission, the acquirer can:

• Make a tender offer.
• Use a proxy to fight.
• Try to acquire firm shares on the open market.

If an individual or group makes a tender offer to buy another company’s shares at a premium over the current market value (CMV), the board of directors may reject it. The buyer can contact shareholders, who may accept a premium based on market value or if they dislike management. The Williams Act of 1968 mandates the publication of all-cash tender offers.

A proxy dispute occurs when rival investors convince each other to use their proxy votes. A hostile takeover attempt makes it possible for a corporation to utilize proxies to vote for acceptance. Selling shares requires a majority of investors to accept the offer.

Resisting a hostile takeover

The target company’s management may use preemptive or reactive measures to deter the takeover.

Differential Voting Rights

Companies might create stock with distinct voting rights (DVRs) to prevent hostile takeovers, giving some shares more power than others. If management has a significant enough shareholding with voting power, it may be harder to gather votes for a hostile takeover. Lower-voting-power shares often yield more enormous dividends, making them better investments.

Employee Stock Ownership Program

Establishing an employee stock ownership program (ESOP) entails a tax-qualified scheme where workers own a significant stake in the firm. Employees may vote with management more. This defense can work.

Past examinations have questioned similar strategies. Some courts have disallowed defensive ESOPs because they benefit management, not shareholders.

Crown Jewel

A crown jewel defense demands the sale of the company’s most valuable assets if there is a hostile takeover, making it less appealing as a takeover target. Many consider this the last line of defense.

Poison Pill

A shareholder rights strategy is a formal defensive technique. It permits current shareholders to acquire freshly issued shares at a discount if one shareholder buys more than a particular proportion, diluting the purchasing company’s shareholding. The discount does not apply to the buyer who raised the defense, generally the purchasing corporation.

The term “poison pill” refers to many defenses, such as releasing more debt to reduce the target’s appeal and giving staff stock options upon a merger.

Alternative Methods

Management may use controversial techniques like the people poison pill, golden parachute, or Pac-Man defense to prevent hostile takeovers.

A “people poison pill” allows vital personnel to resign during a hostile takeover, while the “golden parachute” offers benefits to the target’s executive team in case of termination. The Pac-Man defense involves the target firm actively acquiring stock in the takeover attempt.

Hostile Takeover Examples

A hostile takeover is a challenging and protracted procedure that typically fails. Clorox rejected three proposals from billionaire activist investor Carl Icahn in 2011 and announced a new shareholder rights plan in response. The Clorox board even shelved Icahn’s proxy struggle, which concluded in a few months without a takeover.

Sanofi’s (SNY) acquisition of Genzyme was a successful hostile takeover. Sanofi acquired Genzyme to enter a niche market and extend its product line. Genzyme treats uncommon genetic illnesses. Sanofi acquired Genzyme after Genzyme rejected their friendly takeover bids. They paid a premium for the shares and added contingent value rights, ultimately purchasing the company.

Hostile takeover: how?

To take over a corporation, use tender offers, proxy fights, or open market stock purchases. Acceptance of a tender offer needs a majority of shareholders. Proxy fights replace many resistant board members. An acquirer can also buy enough business stock on the open market to take control.

How Can Management Prevent Hostile Takeover?

Creating a share class with fewer voting rights and a more significant dividend can discourage aggressive takeovers. The attractiveness of these shares makes it more challenging to get enough votes for a hostile takeover, especially if management holds many of them with voting rights.

Companies can also provide employee stock ownership. ESOPs give workers a significant stake in the firm. This allows employees to vote with management, which is a good protection against acquisition.

What’s a poison pill?

A famous hostile takeover defense is a poison pill or shareholder rights strategy. Flip-in and flip-over poison pill protections exist. If someone obtains a certain number of target business shares, a flip-in lets current owners buy additional stock at a discount. The transaction excludes the purchasing business and dilutes its shareholding. A flip-over plan permits target business shareholders to buy acquiring firm stock at a substantial discount if the acquisition goes through, diminishing the acquiring company’s equity.

What Are Other Hostile Takeover Defenses?

The crown jewel, golden parachute, and Pac-Man defenses can protect companies from aggressive takeovers. A company’s crown jewel defense requires it to sell its most valuable assets in a takeover. The buyer may find the firm less appealing. A golden parachute gives target executives significant benefits after the takeover, deterring acquirers. A Pac-Man defense includes the target business aggressively buying the acquirer’s shares.

Conclusion

• A hostile takeover happens when an acquiring business takes over a target company against its management’s preferences.
• An acquiring business might attempt a hostile takeover by directly contacting the target’s shareholders or replacing its management.
• Company-believed undervaluation or activist shareholder demands can lead to hostile takeovers.
• Hostile takeovers involve tender offers and proxy fights.
• Target firms can deploy poison pills or golden parachutes to resist aggressive takeovers.