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Definition Of Hostile Takeover
A hostile takeover is the acquisition of one organization by another. Hostile takeover takes place by approaching a company’s shareholders directly or fighting to substitute the management and get the acquisition approved. In a hostile takeover, the target company’s management does not wish the takeover to go through. The buyer takes control of the target company and forces them to agree to the sale. Therefore hostile takeover takes place only in publicly traded companies.
Further on we will see the methods enabling hostile takeovers.
Methods Of Hostile Takeover
The two primary methods in which a hostile takeover takes place are:
Tender offer is a public bid made by the acquiring company for a large segment of the target company’s stocks at a fixed price. The price quoted is usually higher than the market value of the stock. The premium price is offered so as to convince the shareholders to sell their shares. The bid holds a specific time limit and may have conditions which the target company must follow if the offer gets approval. The acquiring company must file required documents with the regulatory body and should disclose their plans for the acquired company. Sun Pharma’s attempt to acquire Israel Company Taro is an example of tender offer method.
In the proxy fight method, the buyer tries to influence the shareholders to vote out the current management in favour of the team who will support the takeover. Proxy is the term referred to the ability to let someone else vote on behalf of the shareholders. Thus the buyer uses the proxy method to vote for the new board. Usually, managers and displeased shareholders within the company attempt to change the ownership by getting the confidence of the remaining shareholders. The defence strategies that may be applied to prevent the takeover may not be strong enough for the proxy fight method of takeover. Hewlett-Packard’s hostile takeover of Compaq was conducted by the proxy fight method.
After understanding the methods of hostile takeover, let’s look into the reasons for same.
Reasons For Hostile Takeover
There can be numerous reasons why a company may desire to take over another company such as to gain majority market share, cheap valuations with low promoter stake, etc. The company may want to take over and use the acquired firm as a cash cow for the benefit of the primary company.
Reasons For Opposing Takeover
Not all target companies wish to be taken over. This may lead to the hostile takeover as opposed to the approach of friendly acquisition. The other primary reasons for the reluctance of the target company are:
- It may be that a company simply wants to stay independent and have complete control over its operations.
- The members of the management are trying to protect their jobs. They realize that they will be replaced soon after the buyout is completed.
- The shareholders and board of directors might fear the reduction in the value of the company as an aftermath of the buyout. This will also put the company in the danger of running out of business.
These are few of the reasons why a target company opposes takeover. These reasons induce the acquiring company to commence a hostile takeover.
Now let’s have a look at the defence mechanisms that can be used by the target company in case of hostile takeovers.
Strategies To Ward Off Hostile Takeovers
In cases where a hostile takeover is forcefully being conducted, the target company can adopt strategies which may resist the takeover from being approved.
The strategies that can be put to action are:
- Poison pill
- Poison put
- Restrictive takeover laws
- Staggered board
- Restricted voting rights
- Supermajority voting provisions
- Fair price amendments
- Golden parachutes
- ‘Just say no’ defence
- Share repurchase
- Leveraged recapitalization
- ‘Crown jewel’ defence
- ‘Pac-man’ defence
- White knight defence
- White squire defence
To know more about these strategies, visit our article Takeovers.
After gaining an insight into the concept of hostile takeovers, let’s look at an example to have a clearer view of the same.
Example Of Hostile Takeover
AOL and Time Warner, $164billion
One of the classic examples of hostile takeover is the takeover of Time Warner by AOL in the year 2000. AOL announced its plan to take over the much larger and successful firm, Time Warner. However, Time Warner was resistant towards the takeover and wanted to commence functioning as an independent entity. This pushed AOL to opt for the hostile method of takeover. This deal was termed as the deal of the millennium.
The term, ‘hostile takeover’ turns the boardroom into a battlefield. In the corporate world, a takeover results in volatile stock prices and lost jobs. The hostile takeovers create damage to a firm’s reputation and affect lives of all those associated in the years to come.