What is a Hostile Takeover?
A Hostile Takeover refers to a bid to acquire a target company, in which the board of directors of the target is not receptive to the offer and may even attempt to prevent the acquisition.
- How is a friendly acquisition different from a hostile takeover?
- What are the two most common ways that hostile takeovers are pursued?
- What are some examples of preventive measures used to block a hostile takeover?
- What are some examples of active defense measures to block a hostile takeover?
Table of Contents
Hostile Takeover M&A Definition
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 unwelcomed 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.
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
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 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||
|Dead Hand Defense||
|Crown Jewel Defense||
Active Defense Measures
By contrast, active defense measures are when the target (or another third party) resists the takeover attempt with force.
|White Knight Defense||
|White Squire Defense||
|Acquisition Strategy Defense||
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.
Elon Musk Twitter Hostile Takeover + Poison Pill Example
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 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.
“The Twitter board is reportedly not interested in Elon’s takeover offer” (Source: The Verge)