A hostile takeover occurs when a company (the acquirer) attempts to gain control of another company (the target) without the approval or against the wish of the target’s management. This often involves acquiring more than 50% of the voting shares or influencing shareholders to vote out current management. Hostile takeovers are generally viewed negatively as they bypass the agreement of the current management team.
Key Insights
- Nature of Hostile Takeover: An acquiring company takes control against the target management’s wishes.
- Execution: Can be achieved via direct engagement with shareholders or a battle to replace current management.
- Motivations: Often driven by undervaluation of the target company, acquisition of key assets, or activist investors seeking changes.
- Methods: Common techniques include tender offers and proxy fights.
- Defenses: Target companies may employ strategies like poison pill, golden parachutes, and differential voting rights to fend off takeovers.
What Triggers Hostile Takeovers?
The acquirer might launch a hostile takeover due to reasons such as:
- Undervaluation: The target company appears undervalued, making it an attractive investment.
- Strategic Assets Acquisition: The acquirer seeks to gain the target’s brand, operations, technology, or market presence.
- Activist Investments: Activist investors attempting to implement operational changes.
How Hostile Takeovers Are Carried Out
- Tender Offers: The acquirer offers to purchase shares directly from shareholders at a premium over the market value.
- Proxy Fights: The acquirer attempts to persuade shareholders to replace the current management with one that will approve the takeover.
The Williams Act regulates tender offers, requiring disclosure of all-cash tender offers.
Defense Mechanisms Against Hostile Takeovers
Differential Voting Rights (DVRs)
Creating shares with differential voting rights. Shares with higher voting power are owned by management, making it difficult for an acquirer to gain necessary voting majority.
Employee Stock Ownership Program (ESOP)
Establishing an ESOP where employees own a substantial amount of stock can align employee interests with management, making a hostile takeover more difficult.
Crown Jewel
Provisions in the company’s bylaws require the sale of valuable assets in case of a hostile takeover, deterring potential acquirers.
Poison Pill
Also known as a shareholder rights plan, it allows existing shareholders to buy shares at a discount, significantly diluting the acquirer’s stake.
Other Strategies
- People Poison Pill: Key personnel resignation clauses in case of a takeover.
- Golden Parachute: Offering benefits to executives on termination due to takeover.
- Pac-Man Defense: The target company aggressively buys shares of the acquirer.
Examples of Hostile Takeovers
- Failed Attempt: Carl Icahn’s bid for Clorox in 2011 was unsuccessful due to effective defense by Clorox including new shareholder rights plans.
- Successful Takeover: Sanofi’s acquisition of Genzyme, which included going direct to shareholders and a promising bid with contingent value rights.
Conclusion
Hostile takeovers present a set of aggressive acquisition strategies where an entity aims to control a company against its management’s wishes. Firms often utilize defensive maneuvers such as poison pills, golden parachutes, and strategic voting rights to fend off such bids. While some takeover attempts fail, others manage to be successful through direct shareholder engagement and premium offers.
Related Terms: acquisition, shareholder, corporate governance, activist investors, tender offer.
References
- Federal Reserve Bank of St. Louis. “Williams Act”, Pages 3–4.
- LexisNexis. “Employee Stock Ownership Plans in Corporate Transactions”. Page. 6-7.
- The Clorox Company. “The Clorox Company Adopts Stockholder Rights Plan”.
- PR Newswire. “Sanofi-Aventis Completes Acquisition of Genzyme Corporation”.
