Last editedJul 20212 min read
Mergers and acquisitions aren’t always mutually beneficial or even agreed upon. When one company acquires a target company without the consent of the target’s management, this is called a hostile takeover. We’ll discuss the hostile takeover definition below so that you know what to look for, as well as a few defensive strategies to help maintain control.
What are hostile takeovers?
A hostile acquisition takes place when an acquiring company takes over a target company without approval from the board of directors. The acquirer can accomplish this in several ways, either by turning to the company’s shareholders or replacing management to force through the acquisition approval. In a friendly acquisition, the actions are approved by the target company’s board of directors. This is not the case with a hostile takeover, as its name suggests.
How does a hostile takeover work?
There are several strategies employed in a hostile corporate takeover, but what they all have in common is that the target company’s management does not agree with the deal. The acquiring company might believe that the target is undervalued, or they might want access to the target’s industry position and established brand awareness.
To answer the question of how does a hostile takeover work, here are the two main strategies employed:
1. Tender offer
An acquiring company might offer to buy stocks from shareholders at a premium over the market price. This is called a tender offer, with the intention to purchase enough shares to control equity interest in the target company. In most cases, this must be 50% or more of the voting stock.
2. Proxy fight
The second option to force through a takeover is by proxy vote. With a proxy vote, the acquiring company convinces existing shareholders to vote the existing management out. By ousting the current board of directors who object to the acquisition, the takeover company can install new management who will approve the deal instead.
Hostile takeover examples
There are numerous real-world hostile takeover examples.
1. Sanofi-Aventis and Genzyme Corp.
One example of a hostile acquisition is when pharmaceutical company Sanofi-Aventis acquired Genzyme Corp. At first, Sanofi-Aventis made several friendly acquisition offers, which were refused. After this, the acquiring company went straight to the shareholders with a tender offer.
2. InBev and Anheuser Busch
Another example is when international beverage company InBev tried to fire Anheuser Busch’s board of directors in order to gain control. InBev then offered a premium price on shares, which succeeded in ousting the reluctant management.
3. Kraft Foods and Cadbury Inc.
A third real-world example is when Kraft Foods acquired Cadbury. At first, they offered $16.3 billion which was rejected by the Cadbury chair. This was raised to £19.6 billion, which Cadbury accepted willingly but not after a long, drawn-out battle over the takeover.
Defending against a hostile takeover
If a larger company is eyeing up your business, what defenses do you have at your disposal? Here are a few ways to stop a hostile corporate takeover in its tracks.
The “poison pill” strategy makes stocks less attractive to acquiring companies by diluting equity interest. To do this, you can allow your current shareholders to buy new shares at a discounted price. This means that the acquiring company would need to buy more shares to gain a controlling interest in the business. If it’s too expensive, they may look elsewhere.
Another option is the “crown jewels” defensive strategy, which involves selling off the most valuable parts of your company. This makes your company lose value, in turn making it less desirable to others.
A third option is the “Pacman defense,” named after the video game. With the Pacman strategy, the target company flips the switch, chasing after the acquiring company by purchasing its shares. This can be a powerful deterrent to the acquiring company which is now in danger of losing control over its own business interests. To work, the target will need to have enough capital to purchase significant shares in the acquirer.
Hostile takeovers aren’t an everyday occurrence for most businesses, but as your company grows it’s important that you will attract more interest – both wanted and unwanted. It’s a good idea to have a few defensive strategies ready to guard against takeovers.
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