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Hostile Takeover

Step-by-Step Guide to Understanding the Hostile Takeover in M&A

Last Updated March 24, 2024

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Hostile Takeover

How Does the Hostile Takeover Strategy Work?

Companies or institutional investors often attempt to acquire other companies. In the specific case of a hostile takeover, however, the target’s board of directors does NOT support the offer.

In fact, the board may even take the actions deemed appropriate in order to block the hostile takeover from taking place.

By contrast, a friendly acquisition is supported by the target’s board of directors and there tends to be many mutual negotiations (and goodwill) for the two sides to ultimately reach an amicable solution.

But in the case of a hostile takeover, the unwelcome acquisition can quickly turn “unfriendly”, especially if the acquirer has a reputation for being aggressive.

In summary, the difference between a hostile takeover and a friendly acquisition is explained below:

  • Friendly Acquisition: The takeover bid was made with the approval of both the acquirer and the target and their respective management teams and boards of directors. The two sides came to the table to negotiate on friendly terms. If both sides come to an agreement, the target’s board notifies their shareholders of the bid and their recommended decision, and in practically all cases, the target’s shareholders would then follow suit with the board.
  • Hostile Takeover: Usually a hostile takeover is attempted after a failed friendly negotiation when goodwill from the initial negotiation has deteriorated. The management and board of directors of the target company had previously objected to the acquisition, yet the acquirer has decided to continue pursuing the acquisition by going directly to the shareholders and circumventing the board.

Common Types of Hostile Takeover Strategies

“Bear Hug” Strategy

In the “bear hug” strategy, a hostile takeover is characterized by an open letter to the target company’s CEO and its board of directors.

Within the letter, there is a proposed acquisition offer outlined at a premium over the current, “unaffected” stock price.

The “bear hug” tactic attempts to pressure the board by restricting the room to negotiate, while reducing the amount of time available to discuss internally, i.e. causing a “time crunch”.

Often, the proposed offer will state an expiration date that is within the next couple of days, further increasing the burden on the management team and the board to react and respond quickly.

The board of directors, as part of their role, has a fiduciary duty to the shareholders that they represent, meaning that they must make decisions in the best interests of their shareholders.

However, accepting or rejecting an offer with limited time is easier said than done, which is precisely what the bidder is aiming for in such a scenario.

In such cases, rejecting the offer without sufficient consideration could later cause the board to be subject to liability if the decision was ultimately deemed to not be in the best interests of the shareholders.

Hostile Tender Offer

On the other hand, a hostile tender offer consists of an offer being made directly to the shareholders, effectively bypassing the board of directors.

The hostile tender offer is typically utilized once the board has expressed their strong opposition to the takeover attempt, so the bidder may then resort to this option.

For the tender offer to hold more weight, the bidder must acquire a substantial number of shares in the target to obtain more leverage in negotiations, as well as gain a stronger voice to convince shareholders to turn against the current board and management team.

The accumulation of more shares is also a defensive tactic, as the bidder protects against the entry of another potential buyer coming in the purchase the target.

Tender Offer vs. Proxy Fight: What is the Difference?

Usually, a tender offer is eventually resolved in a proxy vote, whereby all shareholders place votes on whether to approve or reject the proposal – moreover, the acquirer strives to convince as many existing shareholders as possible to vote for their cause.

  • Tender Offer: In a tender offer, the acquirer publicly announces an offer to purchase shares from existing shareholders at a sizeable premium. The intent here is to obtain enough shares to have a controlling stake (and voting power) in the target to push the deal through by force.
  • Proxy Fight: In a proxy fight, a hostile acquirer attempts to persuade existing shareholders to vote against the existing management team in an effort to take over the target. Convincing existing shareholders to turn against the existing management team and board to initiate a proxy fight is the hostile acquirer’s goal in this case.

When a public company has received a tender offer, an acquirer has offered a takeover bid to purchase some or all of the company’s shares for a price above the current share price.

Often associated with hostile takeovers, tender offers are announced publicly (i.e. via public solicitation) to gain control over a company without its management team and board of directors’ approval.

Preventive Measures: Hostile Takeover Defense Examples

Preventive measures for blocking hostile takeover attempts are more “defensive” in nature, and most of them focus on internal changes (e.g. increasing dilution, selling off the most valuable assets).

Golden Parachute Defense
  • The golden parachute describes when the compensation of key employees is adjusted to provide more benefits if they were to be laid off post-takeover.
  • Given the hostile nature of the takeover, it is often unlikely that the acquirer would keep the existing management and board, but in this case, they are forced to honor the severance agreements already in place (e.g. continued insurance coverage and pension benefits) that the executives had included to fend off the acquirer.
Dead Hand Defense
  • The dead hand provision shares similarities to the traditional poison pill defense, with the near-identical goal of creating more dilution to discourage the acquirer.
  • Instead of giving shareholders the option to purchase new shares at a discounted price, the additional shares are issued to the entire shareholder base, except to the acquirer.
Crown Jewel Defense
  • The “crown jewels” refer to a company’s most valuable assets, which can include patents, intellectual property (IP), trade secrets, etc.
  • This particular defense strategy is based on an agreement in which the company’s crown jewels can be sold if the company were to be taken over – in effect, the target becomes less valuable after a hostile takeover.

Active Defense Measure: Hostile Takeover Defense Examples

By contrast, active defense measures are when the target (or another third party) resists the takeover attempt with force.

White Knight Defense
  • The white knight defense is when a friendly acquirer interrupts the hostile takeover by purchasing the target.
  • The hostile bidder is termed the “black knight,” and this tactic is done only when the target is right on the cusp of being acquired – often, the target’s management and board have accepted it’ll take substantial losses (e.g. independence, majority ownership), but the result is still in their favor.
White Squire Defense
  • A white squire defense consists of an outside acquirer stepping in to purchase a stake in the target to block the takeover.
  • The distinction is the target does not have to give up majority control as the purchase is only of a partial stake, specifically sized to be just large enough to fend off the hostile acquirer.
Acquisition Strategy Defense
  • The target company can also resort to attempting to acquire another company to make it less attractive.
  • The acquisition is likely to be strategically unnecessary and a hefty premium might need to be paid – so there is lower cash (and/or use of debt) on the post-deal balance sheet.
Pac-Man Defense
  • The Pac-Man defense occurs when the target tries to acquire the hostile acquirer (i.e. flip the script).
  • The retaliation M&A is meant to deter the hostile attempt, rather than being intended to actually acquire the other company.
  • The Pac-Mac defense is employed as a last resort as having to follow through with the acquisition can bring about negative implications.
Greenmail Defense
  • Greenmail is when the acquirer gains a substantial voting stake in the target company and threatens a hostile takeover unless the target repurchases its shares at a significant premium.
  • In a greenmail defense, the target will be forced to resist the takeover by repurchasing its shares at a premium. However, anti-greenmail regulations have made this tactic nearly impossible nowadays.

Staggered Board Defense

If the board of a target company under threat of a hostile takeover is strategically organized to be a staggered board, each board member is classified into distinct classes based on their term length.

A staggered board defends against hostile takeover attempts because this type of ordering protects the existing board members’ and management’s interests.

Since the board is staggered, obtaining additional board seats becomes a lengthy, complex process – which can deter a potential acquirer.

Hostile Takeover Example: Elon Musk and Twitter (Poison Pill)

After a surprise announcement that Elon Musk, the co-founder and CEO of Tesla, was the largest shareholder in Twitter and was offered a board seat, Musk unexpectedly offered to take Twitter private stating that he could unlock the “extraordinary potential” in the communication platform.

Soon after Musk announced his plans, Twitter quickly attempted to fend off the attempt using the poison pill defense, in an effort to dilute Musk’s ~9% stake and make the purchase more expensive – so clearly, Musk’s friendly takeover proved unsuccessful, and the hostile takeover soon began shortly.

On April 25, 2022, Twitter announced it had entered a definitive agreement to be acquired by an entity wholly owned by Elon Musk.

Once the transaction closes, Twitter would no longer be publicly traded, and per the proposed agreement terms, shareholders would receive $54.20 per share in cash.

The buyout has been approximated to be valued at around $43 to 44 billion, which is a substantial premium above the “unaffected” share price before the news of the takeover began to circulate.

According to the board, the poison pill would take effect once an entity – i.e. Elon Musk – acquires 15% or more of Twitter’s common shares.

But Musk successfully securing financing commitments to finance his bid and the potential for a tender offer – at a time when the board’s fiduciary duty (i.e. acting in the best interests of shareholders) was increasingly under question shifted much of the negotiation.

Twitter Elon Musk Hostile Takeover

“The Twitter board is reportedly not interested in Elon’s takeover offer” (Source: The Verge)

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