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      Hostile Takeover Example: Analyzing Corporate Mergers

      By Wasim Omar

      Published on

      April 4, 2023

      7:05 AM UTC

      Last Updated on

      April 5, 2023

      7:05 AM UTC

      Hostile Takeover Example: Analyzing Corporate Mergers

      The 1980s were a hostile time, when the corporate world had seen business aggression at its peak, in what has been described as the wild west of takeovers. Companies have continued to take offensive positions, and mount defenses where appropriate.

      Today, the battle for corporate control is far more sophisticated than ever and continues to play an important role in determining the wider direction of the business world. Many describe takeovers as being an art that many have perfected over time.

      Looking at hostile takeover examples thus is an ideal way of gauging the vicious world of business and corporate affairs, and understanding the wider impacts of the concept itself. Doing so can shed light on financial dynamics, corporate strategies, and motivations.

      Because the hostile takeover is such an insightful business phenomenon, studying it allows for a deeper understanding of how corporations survive and thrive. In light of this, we explore this fascinating domain and assess it through various lenses.

      What is a Hostile Takeover?

      A hostile takeover is an occurrence in the business world, whereby an entity, either a business or person, attempts to acquire control of a particular company without the consent or cooperation of its management or board of directors.

      Typically, the acquiring party attempts to override negotiation with the management of the target company, and directly approaches shareholders with the offer. Thus the willingness of shareholders plays a major role in the outcome of these attempts.

      Understandably, the process is seen as aggressive and contentious, resulting in heavy resistance from the existing management. Board members often resist the move due to conflicts in long-term strategy, and a threat to their control.

      Example of a Hostile Takeover

      For a phenomenon such as the one being discussed, one of the most effective ways to understand how it works is by focusing on hostile takeover examples, to drive the point home.

      In the hypothetical scenario below, the fictional fast food giant, Yummy Co., is interested in a hostile takeover of Burger Ltd.:

      Burger Ltd. is a successful fast-food chain with a market capitalization of $90 million. Yummy Co., a rival food company, wants to acquire Burger Ltd. to expand its market share and gain access to Burger Ltd.’s distribution channels and customer base.

      Initially, Yummy Co. approaches Burger Ltd.’s management with an offer to acquire the company for $95 million. However, Burger Ltd.’s management rejects the offer, feeling that the offer undervalues the company and its potential for future growth.

      Undeterred, Yummy Co. decides to pursue a hostile takeover of Burger Ltd. by making a public tender offer to purchase Burger Ltd.’s outstanding shares at a premium price.

      This would bypass Burger Ltd.’s management and allow Yummy Co. to acquire a controlling interest in the company directly from its shareholders. Using this approach, Yummy Co. buys up shares of Burger Ltd. on the open market and builds up a stake in the company.

      Eventually, Yummy Co. reaches the 50% threshold required to gain control of Burger Ltd.’s board of directors, and they successfully oust the existing board members and install their own executives.

      With control of Burger Ltd., Yummy Co. moves to integrate the two companies and realize the synergies and cost savings that were the driving force behind the hostile takeover.

      Hostile Takeover Strategies

      Having solidified the concept, through both the hostile takeover definition and example, we now take a more in-depth look and assess two primary hostile takeover strategies that are typically employed in the real-world context.

      These are as follows:

      • Tender Offer

        In the case of a tender offer, the interested party would bypass the board of the target company and directly approach its shareholders with an offer to acquire their shares at a premium above market value.

        If this is successful, and at least 50% of the shares in the market are acquired, the party would successfully gain control of the company, and the hostile takeover would be complete.

      • Proxy Vote

        Another more indirect strategy is that of the proxy vote. This involves convincing shareholders to call a vote to replace the current board of directors with new members who are more facilitative of the takeover.

        Typically, this is done during a special meeting by the shareholders where they vote directly, or by proxy, so as to implement the changes on the board.

      Defenses Against A Hostile Takeover

      • Poison Pill

        A tactic used by a company to deter a hostile takeover by making the target company less attractive, often by issuing new shares of stock or offering valuable assets to existing shareholders if a hostile takeover occurs.

      • Crown Jewels Defense

        This also involves diminishing the perceived value of the target company in the eyes of the interested party. It is typically carried out with the company selling off its subsidiaries, or most valuable assets.

      • Supermajority Amendment

        In this defense, the company’s by-laws and provisions are amended which require a supermajority, rather than a majority for approval on moves such as acquisitions. This bumps up the required majority to at least 66%, and even higher.

      • Golden Parachute

        This tactic involves setting traps for hostile bidders such as heavy severance packages for top executives, which would make replacing them highly costly. This would in turn reduce their control, and make the takeover unattractive.

      • Greenmail

        The greenmail tactic involves a company buying back its own stock from a hostile bidder at a large premium to limit its stake in the company.

      • Pac-Man Defense

        This move entails the target company turning the guns around on the hostile bidder, and taking over that company instead, as a means to retain control. It is essentially a response to aggression with aggression.

      Real-life Examples Of Hostile Takeovers

      We now turn to the real business landscape and point out actual hostile takeover examples, to provide deeper context, and illustrate the impacts and strategies companies used in their bid for corporate control:

      • Celegne

        In 2019, Bristol-Myers Squibb (NYSE: BMY) acquired Celgene in a hostile takeover bid worth $74 billion.

        Celgene initially resisted the acquisition, but Bristol-Myers Squibb went directly to Celgene’s shareholders with the offer, eventually securing the necessary votes to complete the acquisition.

      • Yahoo

        In 2008, Microsoft (NYSE: MSFT) made a $44.6 billion hostile takeover bid for Yahoo.

        Yahoo’s board of directors rejected the offer, but Microsoft continued to pursue the acquisition through other means, including a proxy fight and an attempted alliance with activist investor Carl Icahn.

        Ultimately, Microsoft was unable to acquire Yahoo and the two companies did not reach a deal.

      Defending Against A Hostile Takeover

      Having understood how does a hostile takeover work, we can now focus our attention on some of the more sophisticated defense mechanisms companies employ when facing the threat of a hostile takeover. Some of these are as follows:

      • Differential Voting Rights (DVRs)

        A defense where the company issues shares with different voting rights, allows insiders or key shareholders to maintain control over the company even if a hostile bidder acquires a significant portion of the company’s shares.

      • Employee Stock Ownership Program (ESOP)

        A defense where the company sets up a trust to purchase shares on behalf of employees, making them part-owners of the company and more likely to resist a hostile takeover bid.

      How Is A Hostile Takeover Done?

      Here are the general steps involved in a hostile takeover:

      • Acquiring Shares On The Open Market

        The bidder acquires a significant amount of the target company’s shares on the open market, giving it a large ownership stake and potentially enough voting power to influence the company’s decisions.

      • Premium Offer To Existing Shareholders

        The bidder makes a public offer to purchase the remaining shares of the target company at a premium price, bypassing the target company’s management and board of directors.

      • Resistance From Board

        The target company’s management and board of directors typically reject the offer and may adopt various defensive tactics, such as a poison pill, a crown jewels defense, or a supermajority amendment, to prevent the hostile takeover.

      • Counter By Proxy

        The bidder may then launch a proxy fight to replace the target company’s board of directors with individuals who are more amenable to the acquisition. If the approach works, and a majority is acquired, the takeover is successful.

      How Can Management Preempt a Hostile Takeover?

      Ultimately, the best and most sustainable way management can prevent a hostile takeover is by ensuring support at the shareholder level. This is achieved by a transparent managerial style working in the long-term interests of the shareholders.

      When there is open communication between the agent and principal, and the long-term vision is agreed upon, the prospects of a hostile takeover are diminished, even in the case where the company is going through a temporary dip in the market.

      Companies with loyal shareholders, therefore, are far less likely to be cooperative with hostile bidders, even with tempting premiums, than companies with distrust towards management.

      What Is A Poison Pill?

      As discussed above, a poison pill is a defense tactic companies resort to when fighting back against hostile takeovers. It involves pumping out additional shares to dilute and reduce the price of shares, making a takeover economically unattractive.

      Normally, these shares are offered to existing shareholders at a discounted price to ensure that ownership is retained and not passed toward the hostile bidder. This makes it difficult for bidders to carry through with their takeover efforts.

      It must be pointed out, that the poison pill is widely criticized as an act that works against the interests of the shareholders, and only benefits management.

      What Are Other Defenses To A Hostile Takeover?

      There is a range of other defenses a target company can consider when facing the danger of a hostile takeover.

      • Pursue Mergers With Synergistic Companies

        Some companies may use the threat as an opportunity to pursue mergers with companies that benefit their goals in the longer run. This method is sure to thwart hostile bidders who would be unable and unwilling to continue with the takeover bid.

      • Staggered Board Structure

        A staggered board structure allows only portions of the board to be re-elected over time, and not the entire board at once. This ensures board stability and prevents attempts at bringing in new board members to assist with takeovers.

      • White Knight

        In the white knight approach, the target company approaches another party or the white knight. The target company offers itself to be taken over by the white knight, as opposed to the hostile bidder, to ensure the long-term vision is not compromised.

      Conclusion

      A hostile takeover is a business phenomenon usually seen when companies battle it out for corporate control. The business world can be lethal amid intense competition, resulting in such aggressive attempts to consolidate control and market potential.

      There are a range of defense tactics the management of target companies typically resort to when facing the threat of a hostile takeover. Some of these are quite controversial and are criticized for allegedly working against the interests of shareholders.

      Ultimately, the most well-guarded companies against hostile bidders are those with transparent management teams committed to working in the interests of their shareholders. Such companies will always be out of reach during hostile takeovers, even during temporary dips.

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