Understanding Of Hostile Takeover

Jan 17, 2024 By Triston Martin

A hostile or unfriendly takeover is a process by which another company purchases one firm without the consent of the targeted firm. An acquisition takes place between two entities: the acquirer and the target company.

In such a takeover, the buyer bypasses the board of directors and goes straight to the shareholders for support. Toehold acquisitions, tender offers, or proxy contests are frequently used to get shareholder approval for such a takeover.

Hostile Takeovers Involve The Following

When the target business's management isn't receptive to purchase offers, the acquiring corporation may turn to a takeover attempt. To achieve such an unfriendly takeover, proxy contests, toehold acquisitions, and tender offers are the three most common methods.

  • Tender Offers

When a hostile bidder wants to buy a business but doesn't want to deal with the company's management, they may make a tender offer to buy the firm's stock straight from the shareholders. When selling shares, the decision is left up to each shareholder. The prospective buyer intends to hold a majority shareholding in the business.

Proxy Contest

During a proxy contest or proxy struggle, a competitive bidder tries to elect its people to the board of directors of a target firm. The objective is to obtain the approval of a majority of board members.

Toehold Acquisition

Buying a small percentage of a company via the stock market is called a "toehold acquisition. They provide the acquirer the right to participate as a shareholder in the targeted company and file a lawsuit against the target if anything goes wrong.

The Various Prior-to-Offer Defense Strategies

One preventative measure is the pre-bid defense. Its main goal is to lower the value of the company's stock to a future buyer. It does this by making the total cost of the acquisition higher or by putting corporate governance rules that limit the buyer's benefits in place. Here are a few examples of prior-to-offer defensive systems:

Poison pill

By diluting the target company's ownership stakes, this strategy makes it harder and more costly for an interested buyer to gain control. The poison pill flipped is the issue of new stock of the respective company at a steep discount to the current owners. Flip-over pills allow target shareholders to buy shares at a steep discount from the acquiring firm.

Poison Put

This type of defense might be similar to the poison pill since both are meant to make it more expensive to get something. The "poison pill" method involves issuing bonds, which can be cashed out early if the company is taken over, to stop a hostile or unfriendly takeover.

After a takeover, bond issuers now have to pay the current interest on their debts. Unlike poison pills, the technique "poison out" does not affect the number of shares outstanding or their value. Therefore, the prospective acquirer must consider this. However, it might cause the acquirer severe cash flow issues.

A Golden Parachute

It refers to the bonuses, benefits, and severance pay that senior management employees are owed if they lose their jobs. As a result, they may be used as a takeover defense technique that adds to a bidder's overall acquisition costs.

Provisions That Are Supermajority

Supermajority clauses are included in a corporation's charter to require a majority of shareholders to approve acquisitions or any type of merger. The "supermajority clause" is much stricter than the more common "simple majority" requirement, which only needs the approval of more than half of the shareholders who can vote.

Strategies for After-Offer Defense

If a business gets a hostile or unfriendly takeover offer, it may use defensive measures to stop the deal after the offer.

1) The greenmail Strategy

Target companies can use "greenmail" to defend themselves against hostile acquirers when they have already purchased a great deal of their stock. Protecting the target firm is expensive since it pays a huge profit over the market share price.

Instead of completing the acquisition, the company that wanted to buy it gives up and sells the target company's shares at a higher price to it for a profit. The buyer is extorting it by making the target firm pay a premium if it wants the acquirer to drop its acquisition bid.

2) Crown Jewels Strategy

As a defense, "crown jewel" strategies entail transferring the target business's high-value assets to another company or creating a new one out of those assets. The main goal of this approach is to make the target company less appealing to corporate raiders.

3) Pac-Man Strategy

When a takeover offer is made to a targeted company, this defense allows that company to try to buy the potential acquirer. A targeted company aims to acquire the same share of the acquired company as the acquirer.

A plan like this will only work if the company being targeted has the money to buy the stock from the buyer. When an acquirer feels that it is losing influence over the targeted company, it usually abandons its bid to acquire it.

4) A White Knight Strategy

One way to stop such a takeover is to have a good strategic partner to buy out the targeted firm. This tactic is often reserved for extreme circumstances. Friendly takeovers happen when the company being bought or combined knows it will happen but would rather do it because it will benefit from the alliance rather than lose out.

Is There A Way For Management To Prevent Such Takeover?

Stocks with unequal voting rights can be used to thwart hostile or unfriendly takeovers. If management holds many shares with greater voting rights, producing the votes required for such a takeover might be easier since the shares become an appealing investment.

A company may also provide a stock ownership plan to its workers. Stock ownership plans for employees (ESOPs) allow workers to become significant shareholders. Thus, this defense against acquisitions encourages workers to vote regarding acquisitions with their managers.

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