Everything to Know About Hostile Takeovers

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Just because a company refuses to sell doesn’t mean it is unacquirable. Hostile takeovers are very real, and happen on rare occasions. Some hostile takeovers are successful, some are not.?

This article will discuss hostile takeovers, from the buy-side and sell-side.?

What is a hostile takeover?

Contrary to popular belief, acquisitions are not always mutual. A hostile takeover is when an entity forcefully buys a target company without consent. The process usually starts with a friendly offer and escalates when the target company refuses to sell.?

So, how does an entity buy a business that is not for sale?

A hostile takeover can only happen to public companies. Public companies sell shares publicly and have multiple owners, which makes them susceptible to a hostile takeover.?

How does a hostile takeover work?

A hostile takeover can happen in three ways:

1. Stock Purchases - The ownership of a public company is dictated by whoever owns the most shares. Any entity that can acquire more than 51% of the company shares will be the owner. A company or a group of investors may purchase shares in the open market to gain control over a target company.

However, once a certain percentage is reached, purchases must be disclosed and would alert the target company of a possible takeover. This approach can only take an acquirer so far.

2. Tender Offers - Tender offers are the most common way of approaching a hostile takeover. A tender offer is when the acquirer offers to purchase shares above market prices to entice shareholders to accept the offer.?

3. Proxy Fights - Board members, who shareholders elect, need to vote on any significant decision within a public company. A proxy fight may be used to replace current board members who oppose the takeover with representatives from the acquirer. The acquirer would make its pitch to shareholders with the hope that they vote in favor of their candidate.?

How to defend against a hostile takeover

Target companies are not just sitting ducks waiting to be acquired forcefully. Many options and strategies can prevent hostile takeover attempts. Below is the list of the most popular ones:

1. Poison pill defense - The poison pill is triggered when a single entity surpasses a certain equity threshold. This strategy is geared towards diluting the shareholder's ownership and takeover attempt. There are two ways to go about a poison pill defense:

a. The target company issues preferred shares that only existing shareholders can buy.?

b. The target company allows existing shareholders to buy the hostile bidder’s shares at a significantly discounted price.?

2. White knight defense - This defense involves finding a friendlier buyer willing to acquire the entire target company. It’s better to sell the company to someone willing to plan the future together rather than forcefully taking over.?

3. Greenmail defense - This allows the company to repurchase its stock from an individual investor at a premium price. This is a very effective defense, but some companies have an anti-greenmail provision in their corporate charters to prevent a greenmail defense.

4. Staggered board - Companies might have a staggered board structure to prevent a proxy fight. Only a few of the board members are up for election every year. Even if a hostile bidder controls shareholder votes, they will have to wait for several election cycles.

5. Differential voting rights - This strategy gives more voting power to certain stocks than others. A founder or an owner can still make controlling decisions about the company while holding a small portion of shares.

6. Employee stock ownership plan - Other companies give their employees stock options that give them significant ownership and voting power. This will help during hostile takeovers as employees are more likely to side with current owners than people they don’t know..?

7. Crown jewel defense - In this strategy, a target company sells its most valuable and profitable corporate assets to a third party with the ability to purchase them back at a slightly higher price. Without these assets, the target company is less valuable to the hostile bidder and will likely withdraw from the takeover.?

8. Defensive Merger - If threatened with a hostile takeover, a target company can acquire another company and incur significant debt to make themselves less attractive. If a company does choose this strategy, hopefully it’s a well thoughtout acquisition, otherwise, the deal could be harmful for the company and its shareholders.

Last word

Some of the defensive strategies mentioned above are very effective in preventing a hostile takeover altogether. However, most hostile takeover defense stratgies only help make the target company less attractive. If a hostile bidder is set on acquiring a target company, they will most likely succeed. Visit www.mascience.com and learn how to create an effective and peaceful acquisition.?

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