David has taught computer applications, computer fundamentals, computer networking, and marketing at the college level. He has a MBA in marketing.
When You Can't Just Say No
Some people just won't take 'no' for an answer, and in the business world, some companies just won't take 'no' for an answer. If one company wants to buy another company and the target company says no (or the deal doesn't work out for some other reason), a hostile takeover may be the next move. A hostile takeover is when one company acquires another against the wishes of the target company's board and/or management.
Most mergers and acquisitions happen through a mutual agreement. There is a negotiation process, and through full disclosure of each company's financial position and prospects, the two companies agree to become one. However, in a hostile takeover, because the target company has not agreed to be acquired, they may not share all of the relevant financial information that is not public knowledge. So, a hostile takeover can carry an element of risk because the acquirer may not be operating with complete information.
How is a Hostile Takeover Accomplished?
There are three common methods:
- Hostile Bid - Company A wants to achieve a hostile takeover of Company B. Company A goes directly to the shareholders of Company B with an offer to buy their stock at a premium price - substantially above the current market price. This is known as making a tender offer, and if successful, Company A takes majority ownership of Company B, even if the board of Company A objects.
- Open Market - Company A buys a majority of the available shares in Company B on the open market, thus taking control of Company B. This may not always be possible as the majority of shares may be in the hands of private investors and not in holdings of financial institutions, available for purchase.
- Proxy Fight - Shareholders in a company have a right to vote on things, like replacing management or selling the company. They can either vote on their own behalf or assign their voting rights to someone else through a form called the proxy. A proxy fight is when an acquiring company convinces shareholders of a target company to assign them their voting rights through the proxy. The acquiring company then uses the proxy votes to boot out the management who opposed the takeover, taking control.
What can be done to try and stop a hostile takeover? There are some colorful names for takeover defenses:
- Poison Pill - This type of defense is designed to make the target company less attractive or desirable to the acquiring company. An example would be a clause in the shareholder agreement that says if there is a takeover, existing shareholders (except the acquirer) can buy additional shares at a discounted price, which would dilute the acquirer's shares and make them less valuable.
- People Pill - This is a stipulation that in the event of a takeover, certain key personnel of the target company have to resign, denying the acquiring company valuable leadership.
- Pac-Man Defense - The target company turns around and buys a large amount of stock in the acquiring company - if you're going to eat me, I'm going to eat you too.
- Crown Jewel Defense - In the event of a takeover bid, the target company sells off its most valuable assets, making it less attractive.
Hostile Takeover Examples
One of the most famous examples of a hostile takeover happened in 2000 when America Online (AOL) acquired the much larger Time Warner. The move was a disaster from a timing standpoint, happening just before many Internet and technology stocks tanked during what was known as the dot-com bubble burst. AOL shareholders lost a tremendous amount of value, and the two companies split up again not too long afterward. Another prominent example was in the 1980s when investment bank KKR bought RJR Nabisco. That deal took so many twists and turns it was chronicled in a best-selling book and a 1993 television movie called 'Barbarians At The Gate'.
A hostile takeover occurs when one business attempts to acquire another against the target company's wishes. Maybe a friendly merger or acquisition didn't work out, so the acquiring company goes in battle mode, and the target company deploys their defenses. Hostile takeover methods include buying a majority of the shares on the open market, a direct premium offer to the existing shareholders from the acquiring company (a tender offer), and using existing shareholders voting rights (a proxy war). Ways for the target company to defend include making themselves less attractive (Poison Pill), having key leadership resign (People Pill), buying a large amount of shares in the acquiring company (Pac-Man Defense), and selling off key assets (Crown Jewel Defense). Famous hostile takeover examples include AOL/Time Warner and KKR/RJR Nabisco.
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