What is a hostile takeover? Definition and meaning
The definition and meaning of a hostile takeover is the acquisition of a commercial enterprise by a predatory company when the target business does not want to be bought. As the target company’s Board of Directors has recommended against the acquisition, the acquirer goes directly to the shareholders or fights to replace some of the board members in order to get the takeover approved.
The opposite of a hostile takeover is a friendly takeover. A takeover is an acquisition of one company by another company – you can say either ‘takeover’ or ‘acquisition’. M&A (mergers & acquisitions) is a practice of corporate finance that deals with mergers and acquisitions to create a new enterprise, fuse businesses together, or help a firm complete a takeover.
Put simply, if you want to buy a company, its directors don’t want you to acquire it, but you still want to go ahead and succeed, your action is a ‘hostile takeover’.
In a hostile takeover, the predator is known as the corporate raider, bidder or acquirer, while the prey is called the target company.
Tender offer in a hostile takeover
In a hostile takeover, the bidder, also known as the corporate raider, still goes ahead with the acquisition even though the Board of Directors rejected its offer. When this happens, the bidder needs to make the offer attractive enough so that the target company’s stockholders break ranks and agree to sell their shares. The offer to shareholders is called a tender offer.
The main advantage of a tender offer is that the corporate raider is under no obligation to purchase any shares that have been put forward by stockholders until a declared total number of stocks have been tendered.
This does away with the initial need for huge quantities of cash to purchase shares. The raider does not have to liquidate its stock position in case the tender offer falls though.
Other hostile takeover tactics
Another approach in an open market is to buy up as many of the target’s shares as possible until the predator has a majority interest in the stock of the company.
The bidder also has the option of pursuing a proxy fight – it persuades enough stockholders to replace board members with people who are more likely to approve the acquisition.
In 2014, Facebook acquired Whats App for $19 billion in a friendly takeover. The target company was happy with the transaction. Fortunately, a very small percentage of mergers and acquisitions are hostile takeovers.
In some cases, the corporate raider may use a takeover vehicle to launch a hostile takeover. This is usually another company that the raider controls.
According to BusinessDictionary.com, the term ‘hostile takeover’ refers to:
“Acquiring a firm despite the disapproval of, or open resistance from, its board of directors. The acquirer (‘raider’) usually takes the takeover offer direct to the target firm’s stockholders (shareholders) or seeks their approval to remove the obstructing board members.”
Hostile takeover is risky
The majority of mergers and acquisitions that occur in the business world do so by mutual agreement, i.e. both sides agree that the shareholders’ interests are best served by the transaction – they are friendly takeovers.
When there is mutual agreement, both sides have the opportunity to evaluate the costs and benefits, assets, liabilities and can complete the transaction with full knowledge of all the risks and returns.
This is not the case with a hostile takeover. The target company’s management do not typically share any information that is not already available for public view. Consequently, the acquiring company takes a risk and may end up with debts and other problems it did not know about.
Additionally, if the hostile takeover results in a mass exodus of the target company’s top management, the shakeup may disrupt its operation considerably.
In other words, when there is mutual agreement, due diligence can be carried out thoroughly – this is not the case with a hostile takeover.
In 2010, Sanofi S.A. a French multinational pharmaceutical company, fought hard to take over Genzyme Corporation, a biotechnology company headquartered in Cambridge, Massachusetts, USA. In this hostile takeover, Sanofi had to offer considerably more per share than it had initially wanted before triggering a top-up option to assume control of 90% of Genzyme. It eventually paid just over $20.1 billion and successfully acquired Genzyme.
Defense against a hostile takeover
– In the USA: a popular defense tactic against a hostile takeover is to use Section 16 of the Clayton Act to seek an injunction. The target company argues that Section 7 of the Act would be violated if the bidder acquired its stock.
– Poison Pill: this is a common technique that large and small companies use to reduce the risk of being acquired by a corporate raider. The Board of Directors adopts bylaws that entitle the original stockholders the right to purchase extra shares at a discount.
This right is only triggered when a new shareholder has acquired a specific percentage of the company’s stock. As soon as it is triggered, the poison pill increases the total number of shares, thus diluting the raider’s stock holding and making it far too costly for it to gain a majority interest.
– Board Member Elections: if they are staggered, proxy fights will take much longer. It is also possible to introduce bylaws that require over half of the company’s stockholders to approve new owners – this makes it easier for the original shareholders to stop any takeover attempt in its tracks.
– Golden Parachutes: if the severance packages for senior managers and directors are extremely generous, the raider may be put off, because it will find it prohibitively expensive to trim the upper management of the business.
– Greenmail: the target company’s board buys the hostile bidder’s shares at a higher price than their market value.
– White Knight: the Board may look for another company to acquire them – a company they are more friendly with, and one that would better serve the interests of the shareholders.
– Safe Harbor: the targeted company acquires a heavily-regulated firm, thus making itself less attractive to the predatory firm.
In a famous hostile takeover attempt in the corporate world in 2011, American conglomerate company Icahn Enterprises L.P. offered $10 billion to acquire The Clorox Company, an American global manufacturer and marketer of consumer and professional products. Clorox turned it down, so CEO Carl Icahn sent a full-caps letter to the Clorox Board of Directors, directly telling them that the shareholders should decide on the offer. Even though the bid eventually reached $11.7 billion, Icahn was forced to withdraw and abandon the push for a proxy fight.
With a Pac-Man defense tactic, the hunter suddenly becomes the hunted. The target company reacts by attempting to gain control of the corporate raider. The target company literally ‘turns the tables’ and swaps roles with the bidder or makes the bidder attractive to other corporate raiders.
In 1982, the American manufacturing and engineering company Bendix Corporation attempted a hostile takeover of Martin Marietta, an electronics, aerospace and chemicals company. Marietta, however, began purchasing Bendix stock with the aim of gaining a controlling interest.
Allied Corporation, a huge American company, was persuaded by Bendix to come in as a white knight, and the company was sold to Allied that year. So Bendix, which started off as the predator, ended up being the prey.
When the target company turns the tables on the corporate raider, making the raider the target, it is the result of a Pac-Man defense tactic. The hunter turns into the hunted.
Securities Exchange Commission commissioners said in 1984 that they were very concerned about the implications of Pac-Man tactics. However, they also acknowledged that the strategy could benefit stockholders under certain circumstances.
The commissioners balked at endorsing any new regulations, but stressed that the Board of Directors, in resorting to a Pac-Man strategy, must bear the burden of proving that it was not acting solely out of a desire to stay in office.
One concern is the diversion of a significant amount of company money, which could be used to increase profits, to gain control of a corporate raider.
Video – What is a corporate hostile takeover?
This Marketplace APM video explains what a hostile takeover is in easy-to-understand terms and examples. It uses a fictitious example of a small target company – Three Little Pigs – and a corporate raider – MicroHog.