What Is a Hostile Takeover?
The term hostile takeover alludes to the acquisition of one company by one more corporation against the desires of the former. The company being acquired in a hostile takeover is called the target company while the one executing the takeover is called the acquirer. In a hostile takeover, the acquirer goes straightforwardly to the company's shareholders or fights to replace management to get the acquisition approved. Endorsement of a hostile takeover is generally completed through either a tender offer or a proxy fight.
Understanding Hostile Takeovers
Factors playing into a hostile takeover from the acquisition side frequently coincide with those of some other takeover, for example, believing that a company might be fundamentally undervalued or wanting access to a company's brand, operations, technology, or industry traction. Hostile takeovers may likewise be strategic moves by activist investors looking to effect change on a company's operations.
The target company's management doesn't endorse the deal in a hostile takeover. This type of bid happens when an entity endeavors to assume command over a firm without the consent or cooperation of the target firm's board of directors. In lieu of the target company's board endorsement, the future acquirer may then, at that point:
- Issue a tender offer
- Utilize a proxy fight
- Endeavor to buy the vital company stock in the open market
At the point when a company, investor, or group of investors makes a tender offer to purchase the shares of another company at a premium over the current market value (CMV), the board of directors might dismiss the offer. The acquirer can approach the shareholders, who might acknowledge the offer on the off chance that it is at an adequate premium to market value or on the other hand assuming they are discontent with current management. The Williams Act of 1968 directs tender offers and requires the disclosure of all-cash tender offers.
In a proxy fight, opposing groups of stockholders convince different stockholders to allow them to utilize their shares' proxy votes. If a company that makes a hostile takeover bid obtains an adequate number of intermediaries, it can utilize them to vote to acknowledge the offer.
The sale of the stock possibly happens if an adequate number of stockholders, usually a majority, consent to acknowledge the offer.
Defending Against a Hostile Takeover
To stop the undesirable takeover, the target company's management might have preemptive defenses in place, or it might utilize reactive defenses to fight back.
Differential Voting Rights (DVRs)
To safeguard against hostile takeovers, a company can lay out stock with differential voting rights (DVRs), where a few shares carry greater voting power than others. This can make it more challenging to create the votes required for a hostile takeover in the event that management claims a sufficiently large portion of shares with seriously voting power. Shares with less voting power likewise commonly pay a higher dividend, which can make them more attractive investments.
Employee Stock Ownership Program (ESOP)
Establishing a employee stock ownership program (ESOP) involves using an expense qualified plan in which employees own a substantial interest in the company. Employees might be bound to vote with management. In that capacity, this can be an effective defense.
In any case, such schemes have drawn scrutiny in the past. Now and again, courts have invalidated defensive ESOPs because the plan was laid out for the benefit of management, not shareholders.
In a crown gem defense, a provision of the company's local laws requires the sale of the most significant assets on the off chance that there is a hostile takeover, consequently making it less attractive as a takeover opportunity. This is many times thought about one of the last lines of defense.
This defense tactic is officially known as a shareholder rights plan. It allows existing shareholders to buy recently issued stock at a discount on the off chance that one shareholder has bought in excess of a stipulated percentage of the stock, resulting in a dilution of the ownership interest of the acquiring company. The buyer who set off the defense, usually the acquiring company, is excluded from the discount.
The term poison pill is frequently utilized comprehensively to include a scope of defenses, including issuing extra debt, which means to make the target less attractive, and stock options to employees that vest upon a merger.
Some of the time a company's management will shield against undesirable hostile takeovers by using several questionable strategies, for example, individuals poison pill, a golden parachute, or the Pac-Man defense.
A people poison pill accommodates the resignation of key work force in the case of a hostile takeover, while the golden parachute involves granting individuals from the target's executive team with benefits (bonuses, severance pay, stock options, among others) in the event that they are at any point terminated because of a takeover. The Pac-Man defense has the target company forcefully buy stock in the company attempting the takeover.
Hostile Takeover Examples
A hostile takeover can be a troublesome and extensive cycle and endeavors frequently end up fruitless. For instance, billionaire activist investor Carl Icahn endeavored three separate bids to secure household goods monster Clorox in 2011, which dismissed every one and introduced another shareholder rights plan in its defense. The Clorox board even sidelined Icahn's proxy fight efforts, and the endeavor at last ended in a couple of months with no takeover.
An illustration of a fruitful hostile takeover is that of drug company Sanofi's (SNY) acquisition of Genzyme. Genzyme created drugs for the treatment of rare hereditary issues and Sanofi considered the company to be a means to venture into a niche industry and expand its product offering. After friendly takeover offers were fruitless as Genzyme rebuked Sanofi's advances, Sanofi went straightforwardly to the shareholders, paid a premium for the shares, added in contingent value rights, and ended up acquiring Genzyme.
- A hostile takeover happens while an acquiring company endeavors to assume control over a target company against the desires of the target company's management.
- Target companies can utilize certain defenses, like the poison pill or a golden parachute, to avoid hostile takeovers.
- An acquiring company can accomplish a hostile takeover by going straightforwardly to the target company's shareholders or fighting to replace its management.
- Hostile takeovers might happen in the event that a company accepts a target is undervalued or when activist shareholders need changes in a company.
- A tender offer and a proxy fight are two methods in achieving a hostile takeover.
What Is a Poison Pill?
A poison pill, which is officially known as a shareholder rights plan, is a common defense against a hostile takeover. There are two types of poison pill defenses: the flip-in and flip-over. A flip-in allows existing shareholders to buy new stock at a discount in the event that somebody gathers a predetermined number of shares of the target company. The acquiring company is excluded from the sale and its ownership interest becomes diluted. A flip-over strategy allows the target company's shareholders to purchase the acquiring company's stock at a profoundly discounted price in the event that the takeover goes through, which rebuffs the acquiring company by diluting its equity.
How Is a Hostile Takeover Done?
The ways of taking over another company include the tender offer, the proxy fight, and purchasing stock on the open market. A tender offer requires a majority of the shareholders to acknowledge. A proxy fight means to replace a decent portion of the target's uncooperative board individuals. An acquirer may likewise decide to just buy sufficient company stock in the open market to assume command.
What Are Other Defenses from a Hostile Takeover's point of view?
Companies can utilize the crown-gem defense, golden parachute, and the Pac-Man defense to guard themselves against hostile takeovers. In a crown gem defense, a company's local laws require its most significant assets to be sold in the event of a takeover. This can make the company less attractive to the acquirer. A golden parachute gives the top executives of the target with substantial benefits when the takeover is completed, which can stop acquirers. A Pac-Man defense involves the target company turning the tables and forcefully purchasing shares in the acquirer's company.
How Could Management Preempt a Hostile Takeover?
One of the ways of preventing hostile takeovers is to lay out stocks with differential voting rights like establishing a share class with less voting rights and a higher dividend. These shares become an attractive investment, making it harder to create the votes required for a hostile takeover, especially on the off chance that management claims a ton of the shares with really voting rights.Companies may likewise lay out an employee stock ownership program. ESOPs allow employees to claim a substantial interest in the company. This opens the door for employees to vote with management, making it a genuinely fruitful defense against being acquired.