Author: Anam Irfan Patel, ILS Law College
A takeover refers to the process by which one company gains control over another, either by purchasing a majority of its shares or acquiring the entire company. Typically, larger firms initiate takeovers of smaller companies to achieve strategic objectives like increasing market share or diversifying operations. Takeovers can be either voluntary, with mutual agreement between the companies, or hostile, where the acquiring company seeks control without the target company’s consent. In corporate finance, takeovers can be structured in various ways, including acquiring a controlling interest in existing shares, purchasing the company outright, merging to create new efficiencies, or incorporating the target as a subsidiary.
A hostile takeover occurs when an individual or organization attempts to gain control of a target company without the consent of its management or board of directors. This approach involves pursuing acquisition or merger plans contrary to the wishes of the company’s current leadership. Hostile takeovers can cause considerable disruption to a company’s operations, prompting some organizations to implement defensive measures to protect their management’s control and thwart the takeover attempts.
A hostile takeover typically starts with a seemingly friendly approach, where the acquiring company makes an initial offer to the target company, hoping to persuade its board and management to agree to the deal. However, the situation turns hostile if the target company’s board rejects the offer, prompting the acquirer to bypass management and appeal directly to the shareholders.
The acquirer can pursue the takeover through one of three main strategies:
Tender Offers: This involves offering to buy shares at a premium above their market price for a limited period. To succeed, the acquirer must secure a majority of the shares accepting the offer.
Proxy Fights: In a proxy fight, the acquirer seeks to replace the current board members who oppose the takeover with their own nominees. The acquirer attempts to persuade shareholders to vote in favor of these nominees by proxy.
Stock Purchases: The acquirer may buy shares on the open market to gain control. Once a certain ownership level is reached, these purchases must be disclosed, which might prompt the target company’s management to initiate defensive measures.
Hostile takeovers often target established companies that are underperforming. If these companies fail to address their issues, they may become targets for hostile offers, as external investors or companies seek to implement changes. Such takeovers can result in significant disruptions, including layoffs and shifts in business strategy, as the new owners seek to improve profitability and operational efficiency.
In the realm of corporate acquisitions, a distinction is made between friendly and hostile takeovers, each involving different dynamics and strategies.
Friendly Acquisition: This occurs when the target company is supportive of the acquisition proposal. Typically, the acquirer and target engage in discussions or negotiations over several weeks or months before finalizing the deal. During this period, the target company may share confidential information to facilitate a well-informed agreement. Once a consensus is reached, the companies jointly announce the acquisition and often hold a meeting with shareholders and analysts to highlight the benefits of the merger.
Hostile Takeover: This scenario arises when the target company’s management rejects or refuses to negotiate with the acquirer. Instead of engaging directly with the target’s leadership, the acquirer appeals to the shareholders, usually offering a higher price for their shares and presenting a plan to enhance the company’s future performance. In response, the target’s management might attempt to discredit the acquirer or label the investors as corporate raiders to persuade shareholders to reject the offer.
Defenses for Hostile Takeover
White Knight: This defense strategy involves the target company seeking out a more favorable buyer, known as a “white knight,” who is willing to acquire the company under friendlier terms. The white knight could be another company or a significant investor who is willing to purchase the target to prevent the hostile acquirer from gaining control.
Greenmail: Greenmail occurs when a company buys back its shares at a premium from a hostile investor, effectively paying a higher price to eliminate the investor’s threat. Some companies implement policies to avoid greenmail, as it can be seen as prioritizing management protection over shareholder interests.
Stockholder Rights Plan: Commonly referred to as a “poison pill,” this tactic involves issuing new shares to existing shareholders at a discounted price. This dilution of shares makes the acquisition less attractive to the hostile bidder by increasing the number of shares needed to gain control.
Staggered Board: This approach involves dividing board members’ terms into staggered intervals, so only a portion of the board is up for election each year. This makes it more difficult for a hostile bidder to gain control of the board through a single proxy fight.
Differential Voting Rights: Some companies issue different classes of shares with varying voting rights. For example, founders or key insiders may hold shares with significantly more voting power than ordinary shares, which can limit the acquiring party’s ability to amass voting control.
Defensive Merger: In response to a hostile takeover threat, a company might pursue a merger with another firm, often involving substantial debt. This strategy aims to make the company less appealing to the acquirer by increasing its financial burden, though it can negatively impact shareholders if the company ends up with excessive debt or overvalued assets.
Hostile takeovers represent a high-stakes maneuver in the corporate world where one entity seeks to gain control of another against its management’s wishes. This aggressive strategy can lead to significant upheaval within the target company, impacting its operations, employees, and overall strategic direction. While hostile takeovers can sometimes result in beneficial changes, they often lead to considerable disruption and conflict. Companies facing such threats can employ various defensive tactics, including seeking a more favorable buyer, issuing new shares to dilute control, or pursuing mergers to make themselves less attractive targets. Understanding the mechanisms and defenses associated with hostile takeovers is essential for companies to navigate these challenges effectively and protect their long-term interests.
FAQS
What is a hostile takeover?
A hostile takeover is an acquisition attempt where the acquirer seeks control of a company without the target’s management’s approval. This typically involves bypassing the board and appealing directly to shareholders.
How does a hostile takeover differ from a friendly acquisition?
In a friendly acquisition, the target company agrees to the takeover, often after negotiations. A hostile takeover, however, occurs when the target’s management rejects the offer, and the acquirer goes directly to the shareholders.
How can a company defend against a hostile takeover?
Defensive strategies include finding a white knight (a more favorable buyer), implementing a poison pill (issuing new shares to dilute ownership), and staggering board elections to make it harder for the acquirer to gain control.
What impacts can a hostile takeover have on a company?
Hostile takeovers can lead to significant operational disruptions, layoffs, and strategic shifts as the new management works to enhance profitability and efficiency.
