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Hostile Takeover: Definition, Process & Example

Chapter 6 /  Lesson 23
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Instructor: David Whitsett

David has taught computer applications, computer fundamentals, computer networking, and marketing at the college level. He has a MBA in marketing.

Business can be a rough-and-tumble affair. Sometimes a company is acquired by another company against its wishes - a hostile takeover. In this lesson, we'll discuss hostile takeovers, examine the process, and provide real-world examples.

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.

A hostile takeover has elements of a castle siege - attack and defense
Storming the gates

Defense Strategies

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.

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