Hostile Takeovers

Author – By CHITWANDEEP KAUR

INTRODUCTION

A hostile takeover occurs when one company attempts to acquire another company against its wishes. The acquiring company may seek to take control of the target company through the purchase of shares or by other means, such as a proxy fight or a tender offer. Hostile takeovers are often controversial and can have a significant impact on both the target company and the wider business community. In this article, we will explore the concept of hostile takeovers, their impact, and the methods used to prevent or defend against them.

What is a Hostile Takeover?

A hostile takeover is a type of acquisition where the acquiring company seeks to purchase the target company without the agreement of the target company’s board of directors or management. In most cases, the target company is publicly traded, and the acquiring company will seek to purchase a controlling interest in the company’s shares. This can be achieved through a variety of means, including a tender offer, a proxy fight, or the acquisition of shares on the open market.

Hostile takeovers are often seen as aggressive and predatory, and they can have a significant impact on the target company, its employees, and its shareholders. The acquiring company may seek to replace the target company’s management team, cut costs, or restructure the business to maximize profits.

Methods of Hostile Takeovers

There are several methods used by acquiring companies to carry out a hostile takeover. These methods include:

Tender Offer: A tender offer is an offer to purchase a specific number of shares in a company at a premium price. The acquiring company will make the offer directly to the shareholders of the target company, bypassing the target company’s board of directors.
Proxy Fight: A proxy fight occurs when the acquiring company seeks to replace the target company’s board of directors with its own nominees. The acquiring company will typically attempt to persuade shareholders to vote in favor of its nominees, either through a public campaign or by making private arrangements with large shareholders.
Open Market Acquisition: An open market acquisition occurs when the acquiring company purchases shares of the target company on the open market. The acquiring company may use this method to accumulate a significant percentage of the target company’s shares without alerting the target company’s management.

Impact of Hostile Takeovers

Hostile takeovers can have a significant impact on the target company, its employees, and its shareholders. Some of the key impacts of hostile takeovers include:

Disruption: Hostile takeovers can be highly disruptive to the target company’s operations. The target company’s management team may be distracted by the takeover attempt, and the uncertainty can cause stress and anxiety for employees.
Job Losses: Hostile takeovers can often result in job losses, as the acquiring company seeks to cut costs and streamline operations. This can have a significant impact on the target company’s employees and their families.
Shareholder Value: Hostile takeovers can have a significant impact on the value of the target company’s shares. If the acquiring company is successful in taking over the target company, the value of the target company’s shares may increase. However, if the takeover attempt fails, the value of the target company’s shares may decline.

Methods of Preventing or Defending Against Hostile Takeovers

There are several methods that target companies can use to prevent or defend against hostile takeovers. These methods include:

Poison Pills: Poison pills are a defensive measure used by target companies to make themselves less attractive to acquiring companies. Poison pills can take many forms, but they typically involve the issuance of new shares or the granting of stock options to existing shareholders, which dilute the value of the acquiring company’s shares.
Golden Parachutes: Golden parachutes are a type of severance package offered to top executives in the event of a takeover or change in control. These packages are designed to provide financial security to executives who may lose their jobs as a result of the takeover. They typically include cash payments, stock options, and other benefits that are triggered by the change in control.
Greenmail: Greenmail is a practice where a target company buys back shares from an acquiring company at a premium price, effectively ending the takeover attempt. This method can be expensive for the target company, but it can also be an effective way to avoid a hostile takeover.
White Knights: White knights are third-party companies that come to the aid of a target company during a hostile takeover attempt. The white knight will typically make a counteroffer to the target company, which is more attractive than the offer made by the acquiring company. This can be an effective way for the target company to avoid a hostile takeover and secure a more favorable deal.
Crown Jewels Defense: The crown jewels defense involves the target company selling off its most valuable assets to prevent the acquiring company from gaining control of them. This can make the target company less attractive to the acquiring company, as it will not be able to benefit from the value of these assets.
Pac-Man Defense: The Pac-Man defense is a defensive measure used by target companies to turn the tables on the acquiring company. In this method, the target company will attempt to acquire the acquiring company, effectively making the acquiring company the target of a hostile takeover. This can be an effective way to deter the acquiring company from continuing with the takeover attempt.
Scorched Earth Policy: The scorched earth policy is a last resort defense mechanism used by target companies to make themselves unattractive to the acquiring company. This can involve selling off all assets and liquidating the company, effectively destroying its value. While this method can be effective in preventing a hostile takeover, it is not a desirable outcome for the target company or its shareholders.

Conclusion

Hostile takeovers can have a significant impact on target companies, their employees, and their shareholders. While they can be a legitimate business strategy, they are often seen as aggressive and predatory, and they can cause significant disruption and uncertainty. Target companies have several methods at their disposal to prevent or defend against hostile takeovers, including poison pills, golden parachutes, greenmail, white knights, crown jewels defense, Pac-Man defense, and the scorched earth policy. These methods can be effective in deterring hostile takeovers and protecting the interests of the target company and its shareholders