Hostile Takeover
What Is a Hostile Takeover?
A hostile takeover is the acquisition of one company (the “target”) by another (the “acquirer”) where the target’s board of directors has refused the acquirer’s offer, or where the acquirer makes a tender offer that is rejected.
In a hostile takeover, the acquirer tries to replace the target’s management in order to gain control of the company.
A hostile takeover is also known as a hostile bid or a hostile acquisition.
A hostile takeover can be contrasted with a friendly takeover, which is an acquisition that is approved by the target’s board of directors.
A hostile takeover can be achieved in several ways, including:
- Making a tender offer directly to the target’s shareholders
- Making a hostile offer for the target’s assets
- Refusing to negotiate with the target’s board of directors and instead making a hostile offer directly to the shareholders
- Making a hostile offer for a controlling stake in the target company
Hostile takeovers are typically undertaken by large companies looking to expand their businesses.
The motivation for an acquirer in a hostile takeover is usually to increase market share, realize synergies, or achieve other strategic objectives.
How Can a Company Resist a Hostile Takeover?
There are several ways that a target company can resist a hostile takeover, including:
- Having a poison pill in place
- Getting a white knight to come in and make a friendly offer
- Changing the bylaws to make it more difficult for an acquirer to gain control
- Taking the company private
- Selling the company to a secondary buyer
- Start a “scorched earth” policy
- Acquiring the acquirer (aka the Pac-Man defense)
- Triggered option vesting
A hostile takeover is a complex process, and there are many factors that can influence the outcome.
What is a poison pill?
A poison pill is a strategy used by a target company to make itself less attractive to an acquirer.
A poison pill can take many forms, but typically it involves the target company issuing new shares or rights that can be exercised if an attempt is made to acquire a certain percentage of the company’s shares.
The goal of a poison pill is to make the hostile takeover too expensive for the acquirer, or to make it more difficult for the acquirer to gain control of the company.
Poison put
A poison put is a type of takeover defense in which bondholders are given the option of obtaining repayment in the event a hostile takeover attempt occurs before the bond’s maturity date.
The right of early repayment is directly written into the bond’s covenant – i.e., the hostile takeover is the trigger event.
This can make the company less attractive to potential acquirers and help the target company keep its independence.
What is a white knight?
A white knight is a friendly acquirer that comes in and makes an offer for the target company, usually at a higher price than the hostile bidder.
The white knight’s goal is to save the target company from being acquired by the hostile bidder.
A white knight offer can be a defensive tactic used by the target company to resist a hostile takeover.
What are bylaws?
Bylaws are the rules and regulations that govern a corporation.
Changing the bylaws can be a way for a target company to make it more difficult for an acquirer to gain control.
For example, the target company could change the voting requirements so that an acquirer would need a higher percentage of shares to elect a new board of directors.
What does it mean to take a company private?
Taking a company private is when the shareholders vote to delist the company’s stock from public exchanges and make it privately held.
This makes it more difficult for an acquirer to gain control of the company because it is more difficult to buy shares in a private company.
What is secondary buyer?
A secondary buyer is another company that comes in and makes an offer to buy the target company, usually at a higher price than the hostile bidder.
This can be a defensive tactic used by the target company to resist a hostile takeover.
What is a scorched earth policy?
A scorched earth policy is a strategy that’s designed to discourage a hostile takeover by making the target company look unattractive to the bidder.
This can involve the target company:
- selling off its assets (commonly called a crown jewel defense because it’s selling off its “crown jewels”)
- making an acquisition
- terminating contracts, or
- taking other measures to make the company less valuable
In can also include increasing the debt of the company.
This makes the company less attractive to the bidder and more difficult to finance the hostile takeover.
What is acquiring the acquirer?
This is when a company that’s been faced with a hostile takeover turns around and tries to acquire the acquirer.
This is also known as the Pac-Man defense after the game in which a character eats up other characters.
The goal of this tactic is to make the hostile takeover too expensive for the acquirer or to make it more difficult for the acquirer to gain control of the company.
What is triggered option vesting (aka stock acceleration)?
Triggered option vesting is when the target company accelerates the vesting of stock options for its employees.
This makes it more difficult for an acquirer to hostilely takeover the company because the employees will have a greater financial stake in the company.
This can also make it more difficult for the acquirer to retain key employees if they do hostilely takeover the company.
Triggered option vesting is also known as stock acceleration.
A hostile takeover is a complex process, and there are many factors that can influence the outcome.
The target company can take several measures to resist a hostile takeover, but there is no guarantee that these measures will be successful.
Ultimately, it is up to the shareholders to decide whether or not to accept the hostile offer.
There are pros and cons to takeover defenses. On the one hand, they can protect a company from being taken over by an unwanted suitor.
On the other hand, they can also make it more difficult for a company to be acquired by a friendly buyer (a so-called “white knight”).
Ways to Prevent a Hostile Takeover
What Are Some Top Examples of Hostile Takeovers?
Some notable examples of hostile takeovers include:
- AOL and Time Warner, $165 billion, 2000
- RBS and ABN Amro, $98.5 billion, 2007
- Sanofi-Aventis and Genzyme Corp, $20.1 billion, 2010
- Oracle and PeopleSoft, $10.3 billion, 2004
- Vodafone AirTouch and Mannesmann AG, $190 billion, 1999
Hostile Takeovers vs. Friendly Takeovers – What’s the Difference?
A hostile takeover is when an acquirer makes an offer for the target company that is not accepted by the target’s board of directors.
A hostile takeover can be a complex and expensive process, and there is no guarantee that the acquirer will be successful in gaining control of the target company.
A friendly takeover is when an offer for the target company is accepted by the target’s board of directors.
A friendly takeover is typically less hostile and more efficient than a hostile takeover. However, a friendly takeover can still be complex and expensive.
Shareholders’ Rights Plans
A shareholders’ rights plan, also known as a poison pill, is a type of defensive tactic used by a corporation’s board of directors against a hostile takeover.
The plan is designed to make it more difficult and expensive for an acquirer to purchase enough shares of the company to obtain control.
There are two types of poison pills:
- flip-over and
- issue-specific
A flip-over poison pill gives current shareholders the right to buy additional shares at a discounted price if a person or group acquires a certain percentage of the company’s stock.
An issue-specific poison pill is designed to make it more difficult for an acquirer to complete a hostile takeover by making it more expensive to buy certain types of shares, such as those that are voting shares.
A shareholders’ rights plan is not a permanent defense against a takeover and must be approved by shareholders on a periodic basis, typically every three years.
The Securities and Exchange Commission (SEC) has also issued rules that place some limitations on the use of poison pills.
What Are the Benefits and Risks of a Hostile Takeover?
Benefits:
- hostile takeovers can provide a quick and efficient way to acquire another company
- they can be used to quickly gain control of a company that is undervalued by the market
- they can help an acquirer avoid paying a premium for the target company
- they can help an acquirer to avoid negotiating with the target company’s management team
Risks:
- hostile takeovers can be complex and expensive processes
- they can often lead to bad publicity for the acquirer
- they can often lead to employee morale problems at the target company hostile takeovers can often lead to customer loyalty problems at the target company hostile takeovers can often lead to regulatory problems for the acquirer
Voting Rights Plans
A voting rights plan is a type of defensive tactic used by a corporation’s board of directors against a hostile takeover.
The plan is designed to make it more difficult for an acquirer to obtain control of the company.
Voting rights plans commonly come in the form of voting trusts and golden parachutes.
A voting trust is a type of agreement in which shareholders transfer their shares to a trustee, who then votes the shares in accordance with the terms of the trust agreement. Voting trusts are typically used when there is a hostile takeover attempt underway.
A golden parachute is a type of compensation package that is often given to key executives in the event of a hostile takeover. Golden parachutes typically include severance pay, bonus payments, and other benefits.
Golden parachutes are often used as a way to keep key executives from leaving the company in the event of a hostile takeover.
What Are the Benefits and Risks of a Voting Rights Plan?
Benefits:
- voting rights plans can make it more difficult for an acquirer to obtain control of a company
- they can help to keep key executives from leaving the company in the event of a hostile takeover
Risks:
- voting rights plans can be complex and expensive processes
- they can often lead to bad publicity for the company adopting the plan
- they can often lead to shareholder activism
- they can often lead to legal challenges from the acquirer
Staggered Board of Directors
A staggered board of directors is a type of defensive tactic that can be used by a corporation’s board of directors against a hostile takeover.
Under a staggered board, the members of the board are elected for terms that don’t line up completely with each other.
This means that not all of the members of the board are up for election at the same time.
Staggered boards make it more difficult for an acquirer to take control of a company because the acquirer would need to win enough seats on the board in order to get a majority.
What Are the Advantages and Disadvantages of a Staggered Board?
Advantages:
- staggered boards can make it more difficult for an acquirer to take control of a company
- they can give shareholders more time to consider their options in the event of a hostile takeover attempt
- they can give directors more time to make decisions in the event of a hostile takeover attempt
Disadvantages:
- staggered boards can often be classified as a poison pill by shareholders
- they can often lead to shareholder lawsuits
- they can often lead to hostile takeover attempts by proxy fight
Greenmail Option
A greenmail option is a type of defensive tactic that can be used by a corporation’s board of directors against a hostile takeover.
Greenmail options are typically used when an acquirer has already obtained a significant stake in the company.
Under a greenmail option, the company offers to buy back the shares of the acquirer at a premium.
This effectively makes it more expensive for the acquirer to continue with the hostile takeover attempt.
What Are the Advantages and Disadvantages of Greenmail Options?
Advantages:
- greenmail options can make it more expensive for an acquirer to continue with a hostile takeover attempt
- they can give shareholders a way to exit the company at a premium
Disadvantages:
- greenmail options can often be classified as a poison pill by shareholders
- they can often lead to hostile takeover attempts by proxy fight
Dutch Defense
The Dutch defense is an anti-takeover defense that is used in the Netherlands and now other countries.
It is a legal and financial barrier that is put in place to make it difficult for an acquiring company to take over a target company.
The Dutch defense is named after the country in which it originated, and it is also sometimes simply referred to as the poison pill defense.
The Dutch defense typically involves the target company issuing new shares of stock to existing shareholders, diluting the ownership stake of the acquiring company.
This makes it more difficult and expensive for the acquiring company to gain a majority stake in the target company.
The Dutch defense can also involve the target company making itself less attractive to acquirers by selling off key assets or businesses, or by increasing its debt load.
The use of the Dutch defense has come under criticism in recent years, as it can make it difficult for shareholders to get the full value of their investment if a company is sold.
Some critics have also argued that the Dutch defense can entrench management and make it harder for shareholders to hold them accountable.
Despite these criticisms, the Dutch defense remains a popular tool for protecting companies from unwanted takeovers, and it will continue to be used in the Netherlands and elsewhere to prevent hostile takeovers.