What is an Unsolicited Bid?
An unsolicited bid is an offer made by an individual, investor, or company to purchase a company that is not actively seeking a buyer. It is often termed a hostile bid if the targeted company resists the acquisition attempt. These bids arise when a prospective buyer perceives untapped value or potential in the target company.
Key Takeaways
- Unsolicited bids aim to purchase companies not currently seeking buyers.
- They are sometimes referred to as hostile takeovers.
- Companies deploy these bids to control market share, boost profits, or eliminate competition.
- Defensive strategies against unsolicited bids include outright rejection and employee stock ownership plans.
How Unsolicited Bids Work
An unsolicited bid emerges when an acquirer identifies a valuable target and initiates an offer to purchase it. Unlike requested bids, unsolicited bids originate from the acquirer’s impulse rather than the target’s invitation. This type of approach often ignites further unsolicited bids as the news circulates, potentially escalating the purchase price and triggering bidding wars.
Although such bids can involve private enterprises, they are particularly common among publicly traded corporations. These raw takeover bids peaked in the 1980s, a time when bidding companies often saw profit potential in undervalued or poorly managed targets.
Unsolicited vs. Solicited Bids
The fundamental difference lies in the target’s preparedness and intent. A solicited bid occurs when a company actively seeks a purchaser, often comfortably collaborating with buyers through management’s approval—forming a friendly takeover. Contrarily, an unsolicited bid arrives unexpectedly, introducing elements of surprise and potential resistance.
Example of a Record-Breaking Unsolicited Bid
In 2000, Vodafone successfully acquired Germany’s Mannesmann after an initial unsolicited offer was rebuffed. The final deal culminated in a landmark acquisition of $180.95 billion.
Why Companies Make Unsolicited Bids
Unsolicited bids generally occur for several strategic reasons:
- Controlling Market Share: Provides leverage over competition.
- Profiting from Growth Opportunities: Tapping into another company’s growth forecasts.
- Accessing Proprietary Technology: Gaining innovative or cutting-edge technology.
- Limiting Competitors: Reducing competitive threats by absorbing potential market rivals.
- Breaking Up Target Companies: Fragmenting a single company into multiple profit-generating units.
Strategies to Defend Against Unsolicited Bids
Companies targeted by unsolicited offers have numerous defense mechanisms:
- Outright Rejection: The simplest defense is rejecting the offer.
- People Poison Pill: Management hints at resignation in the event of a takeover, complicating the acquirer’s plans to replace management.
- Stock Poison Pill: Shareholders are granted more shares at a discount, increasing the buyout cost for the acquirer.
- Employee Stock Ownership Plan (ESOP): Employees purchase shares, allowing them voting power alongside management.
Example of an Unsolicited Bid in Action
Company ABC, an African oil firm, makes an unsolicited all-cash offer of $1 billion to acquire Company DEF, another African oil company with advanced technology. Company DEF rejects the initial offer due to undervaluation. Later, Company ABC raises its bid to $1.4 billion. Before acceptance is reached, Company XYZ, a Saudi oil company, steps in with an unsolicited bid of $2 billion, ultimately securing the acquisition.
FAQs on Unsolicited Bids
What is the Difference Between Unsolicited and Solicited Bids?
An unsolicited bid surprises the target since it is not seeking a buyer, while a solicited bid entails a proactive search for an acquirer, often aligned with the strategic goal of being sold.
What is a Hostile Takeover?
A hostile takeover occurs when a purchasing company bypasses management, making direct offers to the shareholders or acquiring significant shares to override the management’s objections.
What is the Difference Between a Merger and an Acquisition?
A merger merges two companies into one, combining their resources and strengths to form an entirely new entity. In contrast, an acquisition involves one company purchasing another, with the acquired entity being assimilated into the parent company’s framework.
Related Terms: friendly takeover, poison pill, hostile bid, solicited bid, merger, acquisition.
References
- Journal of Emerging Technologies and Innovative Research. “Merger And Acquisition of Vodafone and Mannesmann”. Page 3.
