In the world of business mergers and acquisitions, a hostile takeover is when one company tries to buy another without the approval of the target company’s board. This article breaks down how these takeovers work, the tactics used, how companies defend themselves, and real examples that have made headlines.
What Is a Hostile Takeover?
A hostile takeover happens when a company attempts to acquire another company against the wishes of the target company’s board of directors. This resistance can arise for several reasons: the board might believe the offer undervalues the company, fear that the acquirer will harm shareholder value, worry about asset sell-offs or significant layoffs, or see a cultural mismatch between the two companies. When the board opposes the acquisition, the acquiring company may take aggressive steps to gain control, leading to a battle for corporate dominance.
Strategies Used in Hostile Takeovers
Companies aiming for a hostile takeover typically use one or more of these methods:
Tender Offer: The acquiring company makes a public offer directly to the shareholders to buy their shares at a premium price, bypassing the board’s approval. This approach often leads to a temporary spike in the target company’s stock price.
Open Market Purchase: The acquirer quietly buys shares of the target company on the open market to build a significant stake. However, regulations often require disclosure once a certain ownership threshold is crossed, alerting the target company to the takeover attempt.
Proxy Fight: The acquiring company tries to persuade shareholders to vote out current board members and replace them with individuals who support the takeover. This method involves organizing shareholder meetings and can be time-consuming and legally complex.
Hostile vs. Friendly Takeovers
| Aspect | Hostile Takeover | Friendly Takeover |
|---|---|---|
| Board Approval | Not obtained; acquirer bypasses management | Obtained; negotiations occur with board consent |
| Approach | Aggressive, may involve public offers or proxy fights | Cooperative, with agreed terms and conditions |
| Negotiations | Minimal or none with current management | Extensive discussions to reach mutual agreement |
| Shareholder Role | Directly targeted to sell shares or vote for new board members | Informed and vote based on board’s recommendation |
| Share Price Impact | Short-term rise; potential volatility due to speculation and defenses | Deal value reflects fair market value |
Defenses Against Hostile Takeovers
To protect themselves, companies employ various strategies:
Preventive Measures (implemented before any takeover attempt):
Poison Pills: Allow existing shareholders (excluding the acquirer) to buy additional shares at a discount, diluting the acquirer’s stake and making the takeover more expensive.
Staggered Board: Only a portion of board members are up for election each year, making it harder for an acquirer to gain control quickly.
Golden Parachutes: Offer lucrative benefits to executives if they’re terminated after a takeover, increasing the cost for the acquirer.
Dual-Class Shares: Create classes of shares with different voting rights, concentrating control among certain shareholders and making takeovers more difficult.
Reactive Measures (used after a takeover attempt begins):
White Knight: Find a more friendly company to acquire the target instead of the hostile bidder.
Greenmail: Buy back shares from the acquirer at a premium to prevent the takeover.
Lawsuits: Challenge the takeover on legal grounds, such as antitrust violations.
Capital Structure Changes: Alter the company’s financial setup to make it less attractive or harder to acquire, such as taking on debt or issuing new shares to friendly parties.
Real-Life Examples
Elon Musk’s Acquisition of Twitter (2022)
Background: Musk became Twitter’s largest shareholder in early 2022.
Hostile Elements: He made an unsolicited offer to buy Twitter for $44 billion. Twitter’s board initially resisted by adopting a poison pill strategy.
Outcome: After negotiations, Twitter accepted Musk’s offer. The deal faced complications, including Musk’s attempt to withdraw, but was finalized in October 2022.
Impact: Following the acquisition, Twitter announced significant layoffs, reducing its workforce by about half.
Xerox’s Attempted Takeover of HP (2019-2020)
Background: Xerox made an unsolicited offer to acquire HP, despite being smaller in market capitalization.
Hostile Elements: HP’s board rejected the offer, leading Xerox to initiate a tender offer and a proxy fight. HP responded with a poison pill defense.
Outcome: Xerox withdrew its offer in March 2020 due to market uncertainties caused by the COVID-19 pandemic.
Impact: The attempt highlighted the challenges smaller companies face when trying to acquire larger firms and the influence of global events on such deals.
Broadcom’s Attempted Acquisition of Qualcomm (2017-2018)
Background: Broadcom made an unsolicited offer to acquire Qualcomm for $130 billion, one of the largest in tech industry history.
Hostile Elements: Qualcomm’s board rejected the offer. Broadcom initiated a proxy fight to replace Qualcomm’s board members.
Outcome: The U.S. government blocked the takeover on national security grounds in March 2018.
Impact: The case underscored concerns about foreign ownership in critical U.S. technology companies and set a precedent for government intervention in large M&A transactions.
Conclusion
Hostile takeovers are aggressive strategies that can significantly impact companies and industries. Understanding the tactics used and the defenses available is crucial for stakeholders navigating the complex landscape of mergers and acquisitions.
