Hostile Takeover

A hostile takeover – is a form of company’s acquisition forced by another company. The company that falls under the pressure of another one is called a target firm, or simply target; the other one is known as an acquiring company, or acquirer. Typically, the target company’s management doesn’t approve the acquisition, therefore the term “hostile takeover” was introduced.

Reasons for the Hostile Takeover

Generally, an acquirer is larger than a target company. Thus, it’s a common practice, when a big corporation finds a small and undervalued company with a great potential and decides to take over it. Also, the acquirer might be motivated to gain control over another company by a strategic desire to use the target company’s popular brand or unique technology.

Nonetheless, the acquisition might also take place when the most active shareholders of the small company want changes or disagree with the company’s management policy. In this case, the initiative might come from the small company itself, but the decision isn’t always unanimous, hence leading to the hostile takeover.

Process of the Hostile Takeover 

An acquisition of a small company might occur through a takeover, or purchase of the significant amount of the company’s shares, which give an acquirer authority over the acquired company. If more than 50% of the target’s shares are bought, it will have an authority to make some decisions related to the company’s future without management’s approval. Besides the purchase of shares, the takeover might occur through the impact of the acquirer on the target company’s board of directors for approving the acquisition.

The hostile takeover is finalized by either of these options:

• A tender offer, which is a public offer for the target company’s accusation. In the US, it has to meet the requirements of the Williams Act – a federal law on the process of companies’ acquisition.
• A proxy fight, which is a competition for the shareholders’ votes. Usually, some activist investors, who are approving the company’s acquisition, try to convince other shareholders to make the same decision at a shareholders’ meeting.
• Control of shares, which the acquirer might achieve by purchasing the company’s majority stake on the open market, if possible. In order to complete the acquisition, shares might be bought at a premium, or at a higher price than its current market value (CMV).

Antitakeover defensive strategies

A lot of antitakeover strategies have been invented in order to protect companies from forcible takeovers. These defensive strategies can be divided into two groups:

1. Strategies for preventing the hostile takeover.
2. Strategies of fighting against the hostile takeover.

Prevention strategies are preliminary measures of defending against the hostile takeover. There are some of them:

• Differential voting rights (DVRs) refer to the dissimilar voting power of shares. Therefore, a company prevents the possibility of hostile takeover in the future. DVRs give trusted shareholders an ability to protect the company by having more meaningful votes on the company’s meeting, while other shareholders with less meaningful votes might have a greater dividend as a bonus.
• An employee stock ownership program (ESOP) is another prevention tactic aiming to increase the shareholders’ loyalty. The company rewards its workers by giving them ownership interest in it. The employees as shareholders are more loyal to the company they work for, thereby they are more likely to agree with the management decisions.

Fighting strategies refer to the defensive actions taken by the target company when it’s endangered by the hostile takeover. Some of the widespread tactics are listed below:

• A poison pill is probably one of the most famous antitakeover strategy of selling the company’s stock at a discount to the loyal shareholders. This measure usually gets activated when one of the shareholders violates the rule of buying more than a certain amount of the company’s shares, hence putting it in danger of the takeover. This type of the poison pill is also called a flip-in. There is another type of the poison pill, otherwise known as a flip-over. Actually, it discloses the poison pill concept even better than the first one. The flip-over takes place during the process of the company’s acquisition. Its stock gets sold with a great discount, which eventually cause serious damage to the acquirer. Sometimes, another tactic is considered to be the poison pill as well. It refers to the situation when the company defense itself by increasing its debt burden. Basically, the more debt the company has, the less attractive it becomes to the acquirer.
• A crown jewel is a symbolic name of another extreme defensive tactic aimed at lowering the company’s value, thereby lowering its attractiveness for the possible acquirer. Typically, the board of directors comes to the decision to sell the company’s most valuable assets as a final measure to protect it from the acquisition.

Some of the controversial defensive tactics can form an additional group as well. However, they might cause serious damage not only to the target company itself, but also to the people involved:

• A people poison pill requires employees of the target company to leave their job places in case of the hostile takeover.
• A golden parachute is quite similar to the previous tactic, but requires only the company’s privileged members to step out of business in the light of the hostile takeover risk. However, they will be rewarded with substantial benefits if this move is taken.
• A Pac-Man defense is actually an aggressive tactic of attacking the acquirer in order to scare it off by buying its shares. Basically, the target company attempts to become the acquirer itself.

Example of the Hostile Takeover

Defensive tactics have proved to be efficient against hostile takeovers. Therefore, a lot of takeovers end up unsuccessfully for the acquirer. However, there are some examples of companies’ aggressive acquisition. Let’s consider one of them.

In 2009 one of the most well-known US food manufacturer Kraft Foods Inc. decided to acquire the UK confectionery company Cadbury PLC, which wasn’t less popular as the US company itself. In this example, Kraft Foods Inc. was the acquirer, while Cadbury PLC was the target. The first company offered a significant amount of money for buying the target, but the sum wasn’t significant enough for Cadbury PLC; the offer was denied. Even the UK government interfered in the takeover, meaning to protect the successful national business. But eventually, in 2010 the hostile takeover was finalized by the US company’s new price offer above $19 billion. The tender offer was accepted, and Cadbury PLC became a part of Kraft Foods Inc.