Hostile Takeover as a Part of an M&A Strategy

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Hostile takeover as a part of M&A strategy

When it comes to expanding a business through M&A, companies have a variety of strategies at their disposal. One of them is a hostile takeover, which stands out as a bold and unconventional approach.

The article below explores the basics of hostile takeovers, giving tips on the best hostile takeover technique and shedding light on hostile takeover defense strategies.

What is a hostile takeover?

A hostile takeover refers to the acquisition of a target company by a hostile acquirer that is met with resistance from the target company’s management and board of directors.

The hostile bidder may attempt to gain control of the target company for several reasons:

  1. Accessing strategic assets. The target may possess valuable assets such as proprietary technology, intellectual property, or a customer base that the acquiring company desires to leverage.
  2. Expanding market share. A hostile takeover lets a potential acquirer access new markets, increase market share, and consolidate its position in the industry.
  3. Achieving synergies. The combined company may achieve synergy in the form of cost savings, operational efficiencies, shared resources, or complementary product portfolios.
  4. Eliminating a competitor. By taking over the target company, the acquiring company reduces competition and benefits from increased market power, increased market share, and reduced competitive pressure.
  5. Capitalizing on growth potential. If the target is undervalued and has growth potential, a hostile takeover bid may be an opportunity to acquire the company at a favorable market price and realize its value by implementing strategic initiatives.
While a friendly takeover involves cooperative negotiations and mutual agreement between two companies, a hostile takeover occurs against the will of the target company’s management team.

Are hostile takeovers legal?

Hostile takeovers can be legal, depending on the jurisdiction and compliance with applicable laws and regulations. In many jurisdictions, there are legal frameworks that govern the acquisition of companies. These legal frameworks outline:

  • Procedures
  • Disclosure requirements
  • Rights of the target’s shareholders
  • Fiduciary duties of board members
  • Regulatory approvals necessary for a takeover to be considered lawful

However, hostile takeovers often involve complex legal considerations and face legal challenges. Target companies may employ various legal defenses and tactics to resist or delay the takeover attempt.

Additionally, regulatory authorities may get involved if the takeover raises concerns related to competition, national security, or other regulatory aspects. For example, in 2010, the British government intervened in response to Kraft Foods’ hostile takeover attempt for Cadbury, resulting in changes to the rules governing how foreign companies acquire UK companies.

Besides legal aspects, there are ethical considerations. Opponents of hostile takeovers argue that such acquisitions can be disruptive, damaging to employees and communities, and prioritize short-term financial gains over long-term stability and sustainability.

Attacking strategies of hostile takeovers + tips

Here are the most common hostile takeover techniques and their descriptions. 

Hostile takeover strategiesDescriptionProcessKey considerations
1. Proxy fightA proxy fight involves seeking support from existing shareholders to replace the target company’s management and gain control.1. Activist shareholders solicit a proxy vote.
2. Proxy statement is filed with regulatory bodies.
3. Shareholders vote on board seats. 
Requires substantial shareholder engagement.
Legal and regulatory compliance is crucial.
Potential reputational and legal risks.
2. Tender offerA tender offer is a direct offer to the target company’s shareholders to purchase shares at a premium price with the purpose of getting a controlling stake.1. The tender offer is publicly announced. 
2. Shareholders decide to tender their shares.
3. Acquirer purchases shares directly from shareholders.
Requires substantial financial resources.
Compliance with regulatory requirements.
The potential need for financing and due diligence. Potential legal and regulatory challenges. 

7 tips for a successful hostile takeover

The following contribute to the success of a hostile takeover strategy:

  1. Conduct extensive research on the target company, its financials, vulnerabilities, governance structure, and shareholder composition.
  2. Accumulate a significant ownership stake in the target company through open market purchases (toehold acquisition) or negotiated transactions to gain influence and more voting power.
  3. Engage in a proxy solicitation campaign to persuade shareholders to vote in favor of the acquirer’s board nominees or proposals, replacing the target’s management.
  4. Identify and engage key shareholders that may support the hostile takeover and help persuade other shareholders.
  5. Secure enough financing to fund the hostile bids and related expenses, ensuring the availability of sufficient resources to navigate potential obstacles.
  6. Develop a public relations strategy to communicate the rationale and potential benefits of the takeover to key stakeholders, including shareholders, employees, and the general public.
  7. Schedule the hostile takeover bid to take advantage of favorable market conditions, target company weaknesses, or external factors that may enhance the likelihood of success.
  8. Maintain a determined approach to negotiate with the target’s board and management to reach a resolution that benefits both parties.

Defensive strategies of hostile takeovers + tips

Here are descriptions of the most common hostile takeover defenses. 

Hostile takeover defensesDescriptionProcessKey considerations
Poison pill defense Issuing new shares to existing shareholders, diluting the acquirer’s stake, and making the takeover financially unattractive.1. Board approval
2. Shareholder approval
3. Implementing poison pill provisions
Potential impact on stock price and corporate governance
Crown jewel defenseSelling off valuable assets of the target company to make it less appealing to the acquirer.1. Identifying key assets
2. Negotiating asset sale
3. Board approval
4. Shareholder approval
Potential Impact on stock price and corporate governance
Golden parachute defenseOffering lucrative financial packages to key executives in the event of a change in control, discouraging the acquirer from removing them.1. Board approval
2. Preparation of executive compensation packages
3. Legal compliance
Cost implications
Alignment with shareholder interests
Potential backlash from shareholders
Pac-Man defenseA target company tries to purchase the shares of the would-be acquirer, reversing the hostile takeover attempts.1. Buying back the target company’s shares
2. Buying shares of the acquiring company
An expensive strategy that may increase debt for the target company
White Knight defenseSeeking a more favorable alternative by finding a friendly third-party bidder to acquire the target company.1. Identifying potential white knights
2. Negotiating terms of the friendly acquisition
3. Board approval
Alignment of interests
Financial capabilities of the white knight
Potential impact on the target company’s culture and operations
Standstill agreement defenseNegotiating a standstill agreement with the acquirer, imposing restrictions on further acquisition attempts for a specified period.1. Negotiating terms and conditions
2. Legal review
3. Board approval
Duration of the standstill period
Impact on shareholder rights
Potential legal challenges
Differential voting rightsA defensive measure where the target company issues shares with varying voting rights to certain shareholders, limiting the voting power of hostile acquirers.1. Board approval
2. Issuing shares with differential voting rights to certain shareholders
Potential legal and regulatory implications
Effectiveness in resisting hostile takeovers

7 tips for a successful hostile takeover defense

Here’s what can be done to prevent hostile takeovers:

  1. Create a defense strategy tailored to the specific needs of the target company in advance. It should include various defense mechanisms, like white knight arrangements or poison pill defenses.
  2. Build strong relationships with key shareholders and gain their support in resisting the hostile takeover.
  3. Identify any vulnerabilities that may make the company an attractive target and take appropriate measures to mitigate those risks.
  4. Build and maintain a healthy financial position with adequate cash reserves and manageable debt levels. This provides the company with more options to defend against a takeover.
  5. Engage legal and financial advisors that provide guidance on defensive techniques and compliance with regulatory requirements.
  6. Seek potential white knights or alternative merger partners who offer a more favorable outcome for the company.
  7. Develop backup plans for various scenarios, including potential negotiation, litigation, or alternative exit strategies. Flexibility and preparedness are key to responding to a hostile takeover effectively.

How hostile takeovers really work + examples

A hostile takeover is a complex process that involves several steps and varies depending on the specific circumstances. Here is a description of a possible mechanism for a hostile takeover:

  1. Identification of the target. The acquiring company identifies a target company believed to be undervalued or demonstrates the potential for growth.
  2. Accumulation of shares. The acquiring company starts acquiring shares of the target company in the open market or through private negotiations, gradually increasing its ownership stake.
  3. Hostile takeover strategy implementation. There are usually two possible scenarios:
  • Proxy fights:
    • Company A identifies Company B as a desirable acquisition target.
    • Company A seeks to gain control of Company B by soliciting votes from shareholders to replace the current board of directors with their own nominees.
    • Through an aggressive proxy campaign, Company A convinces shareholders that the change in leadership will benefit the company and increase shareholder value.
    • If successful, Company A’s board nominees are elected, granting Company A control over the decision-making process of Company B.
  • Tender offers:
    • Company A launches a hostile tender offer to acquire Company B by offering to purchase shares directly from Company B’s shareholders at a premium price.
    • The tender offer is made directly to shareholders, bypassing Company B’s management and board of directors.
    • Company A seeks to acquire a controlling stake in Company B by convincing shareholders to tender their shares.
    • If a sufficient number of shareholders accept the tender offer, Company A gains control over Company B and its operations.
  1. Resistance by the target company. The target company’s board may resist the hostile takeover by implementing defensive measures such as a poison pill, crown jewel, golden parachute, or Pac-Man defense.
  1. Legal and regulatory considerations. Throughout the process, both the acquiring and target companies must comply with relevant laws, regulations, and disclosure requirements imposed by regulatory authorities.
  1. Completion or failure. If the acquiring company successfully accumulates a controlling stake of shares or gains shareholder approval, the hostile takeover is completed. However, if the target company manages to fend off the takeover attempt or finds a more favorable alternative, the hostile takeover fails.

Now let’s explore real-life examples of hostile takeovers.

Example 1: InBev and Anheuser-Busch

Date: June 2008
Hostile takeover strategy: proxy fight
Defense strategy: poison pill
Value: $52 billion

In June 2008, InBev made an unsolicited bid to acquire Anheuser-Busch for $46 billion. The takeover turned hostile, resulting in lawsuits and a proxy battle. Eventually, InBev increased its offer to $52 billion, convincing shareholders to accept the deal.
The merged company became Anheuser-Busch InBev. In 2016, it further expanded by merging with SABMiller in a $104.3 billion deal, one of the largest mergers ever.

Consequences: cost-cutting measures, layoffs, and shifts in corporate culture.

Example 2: Elon Musk and Twitter

Date: April 2022
Hostile takeover strategy: tender offer
Defense strategy: poison pill
Value: $44 billion

On April 14, 2022, Musk made an unsolicited offer to purchase the company, highlighting the platform’s “extraordinary potential”.
Twitter responded by implementing a poison pill defense strategy, aiming to dilute Musk’s approximately 9% stake and increase the cost of the acquisition. Consequently, Musk’s initial friendly takeover attempt failed. On April 20, Musk disclosed that he had secured financing for a potential tender offer.
On April 25, the board unanimously agreed to accept Musk’s buyout offer of $44 billion.

Consequences: layoffs, policy changes, the introduction of a subscription model with limited success, user attrition, reputation concerts, uncertain future.

Key takeaways

Let’s summarize:

  • Hostile takeovers involve the acquisition of a target company against the will of its management and board of directors, often driven by the desire to access strategic assets, expand market share, and eliminate competition.
  • Hostile takeovers are legal, but they often face legal challenges and regulatory interventions.
  • Attacking strategies in hostile takeovers include proxy fights, tender offers, and toehold acquisitions.
  • Defensive strategies in hostile takeovers include the poison pill, crown jewel, golden parachute, Pac-Man, white knight, standstill agreement, and differential voting rights.
  • Tips for a successful hostile takeover are conducting research, accumulating a significant ownership stake, engaging shareholders, securing financing, developing a public relations strategy, and timing the bid strategically.
  • Tips for a successful hostile takeover defense are creating a defense strategy, building relationships with key shareholders, identifying vulnerabilities, maintaining a healthy financial position, engaging advisors, and seeking alternative merger partners.

Author

Ronald Hernandez

Founder, CEO at dataroom-providers.org

Data room selection & optimization expert with 10+ years of helping companies collaborate more securely on sensitive documents.

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