What Is A Hostile Takeover?

How a Hostile Takeover Works

When some smaller cap companies show potential, larger holding companies and/or industry competitors may become interested in merging with or acquiring one of those companies. This can be for several reasons including the possibility of gaining access to a company’s patented property, or gaining the ability to sell to the company’s niche market. Regardless of the reason, when an acquiring corporation sees an opportunity to benefit from combining with another company, it has a handful of options.

The most common option would be to meet with the management of the target company and propose some sort of bilateral merger or acquisition. However, in many cases, the management of a target company may not be open to the merger idea. The target company might tell the acquiring corporation that they are not open to being acquired, or may demand certain conditions that would be a non-starter to the acquirer. This could result in a situation where the acquiring corporation considers a hostile takeover.

Once the acquiring corporation knows that negotiating with the target company’s management for an acquisition won’t work to their benefit, they may look to alternative ways to take over the company. For the acquiring corporation to consider some of the methods, they typically would have to see something valuable in the acquisition of the target company. By this point, the financial analysts for the acquiring firm will typically have examined the target company and discussed the valuation with the corporation’s management. This valuation will typically also involve a projection and cost/benefit analysis of pursuing different avenues to acquire the target company. It is at that point that the management would decide whether to move forward with one of the hostile takeover options.

Types of Hostile Takeovers

There are two main methods of a hostile takeover that an acquiring corporation can utilize. Determining which of these to use will be decided by the corporation’s management and will largely depend on their financial situation.

1. Tender Offer

With this option, the acquiring corporation will appeal directly to the shareholders of the target company and offer to buy their common shares at a predetermined price (usually) higher than the current market price of the stock. This offer will be for a limited time and is often conditioned upon a certain number of total shares being sold. The incentive for the shareholders will be that the offer is usually significantly higher than the current market price of the stock and could produce a substantial profit if the deal goes through.

2. Proxy Vote

Also known as a proxy fight or proxy contest, this method also involves appealing to the shareholders of the target company. The difference from a tender offer is that instead of offering to buy out the shares, the acquiring firm will attempt to convince the shareholders to allow them to use their voting rights to elect the new board of directors of the company. They will contact the shareholders of the existing firm to persuade them in favor of their acquisition proposal. If they can gain enough proxy votes, they can elect a board of directors who will approve the company’s intended acquisition.

How Companies Fight a Hostile Takeover

When a company’s management becomes aware that another corporation is attempting a hostile takeover, there are a few ways they can respond in addition to some preventative actions that they can take to deter the acquisition attempt in the first place.

1. Poison Pill

Formally known as the Shareholder Rights Plan, this is a type of reactive tactic to fight a hostile takeover. With this tactic, existing shareholders are allowed to purchase shares of newly issued stock from the company at a significantly discounted price once a set number or percentage of shares are purchased by a third party. If enough newly issued shares are purchased by the existing shareholders at the discounted price, it will dilute the value of all shares including for the company that is attempting the takeover. The goal is to make it so that the acquiring company can’t buy enough shares to complete the takeover.

2. Stock Options

As far as proactive actions go that can deter hostile takeovers, stock options as a part of a benefits package for employees is a common practice. Essentially, stock options are a type of compensation given to employees in the form of company shares. There are a few different types of stock options, and they have several benefits including retirement, allowing participation in the growth of the company, and incentivizing employees to stay with the company. However, they can also be a deterrent to hostile takeovers. If the company can keep a substantial amount of the stock ownership amongst its employees, it would likely be difficult for an outside party to convince them of an acquisition or to accept a tender offer when the company’s management already has a close relationship with them.

How Hostile Takeovers Impact Shareholders

As mentioned earlier, a hostile takeover can provide a substantial profit for shareholders when the acquiring firm offers to take over the company at a price much higher than the current market price of the stock. After the takeover is complete, shareholders of the acquiring firm will also have likely felt a significant impact. The announcement of an attempted takeover alone is a momentous event that usually causes volatile trading of the acquiring corporation’s stock as investors process the outlook of the potential acquisition. If the takeover fails, it could ultimately hurt the acquiring firm’s stock value.

Historical Hostile Takeover Examples

JetBlue’s Takeover Attempt of Spirit

In 2022, the airline company JetBlue, attempted to negotiate an acquisition with Spirit Airlines, after Frontier airlines had made a bid to acquire the company. Spirit rejected the $33 per share offer in May 2022 citing a “substantial completion risk” regarding whether regulators would allow the deal to go through. After the bid was rejected, JetBlue announced a tender offer to Spirit shareholders of $30 per share for all outstanding shares, well over the stock market price which had been trading at around $20 per share. Spirit has since urged the shareholders to reject the offer. As of June 2022, the takeover fight is still ongoing.

InBev’s Takeover of Anheuser-Busch

In June 2008, InBev, one of the largest multinational brewing companies, announced an offer to acquire Anheuser-Busch, the largest brewing company in the United States. The deal was rejected by Anheuser’s management, and so InBev looked to force a hostile takeover. They launched a proxy vote campaign to Anheuser shareholders to persuade them to use their voting rights in favor of the acquisition offer. Management of both companies filed tactical lawsuits against each other to get the edge in the fight. Eventually, InBev upped its original $65 per share offer to $70 per share which was enough to persuade enough shareholders to vote in favor of the deal and complete the takeover in November 2008.

Bottom Line

While a hostile takeover is a rather unconventional acquisition of a company, it is usually the only option if the target company’s management is opposed to the idea. Hostile takeovers are generally difficult to pull off because they frequently turn into tactical fights where the target firm has a lot of leverage and existing shareholders will have the final say. Company acquisitions are complicated and risky but can come with tremendous long-term rewards when they work out successfully.

FAQ

Are corporate hostile takeovers legal?

Yes, hostile takeovers are legal, but legal complications can arise around some of the tactics used by both the target company and the acquisition company during a takeover fight.

Are hostile takeovers ever successful?

Yes, there have been many successful takeovers over the years, but they often fail due to effective defense tactics that a target company can use.