What Is a Hostile Takeover?
Let me explain directly: a hostile takeover happens when an entity takes control of a company against the wishes of that company's management. You need to understand it's an acquisition strategy where the acquirer secures more than 50% of the voting shares to gain control.
How It Works
Here's how it unfolds: an acquiring company attempts this by going straight to the target company's shareholders or by pushing to replace its management. This often stems from beliefs that the target is undervalued, or when activist shareholders seek operational changes. You should know that hostile takeovers typically start with a tender offer—buying shares at a premium over market value—or a proxy fight to convince stockholders to oust current management and install one favorable to the takeover. Remember, the Williams Act of 1968 requires disclosure for all-cash tender offers, regulating this process.
Defenses Against a Hostile Takeover
If you're managing a company, you can use preemptive or reactive defenses to deter these moves. Consider differential voting rights, where some shares have more voting power, making it harder to rally votes if management holds them. An employee stock ownership program lets employees own substantial interests, often aligning their votes with management—though courts have sometimes invalidated these if they benefit management over shareholders.
Another option is the crown jewel defense, requiring the sale of key assets upon a takeover, reducing the target's appeal. Then there's the poison pill, or shareholder rights plan, which lets existing shareholders buy discounted new stock if one buyer exceeds a certain ownership threshold, diluting the acquirer's stake. This includes flip-in and flip-over types, and it can extend to issuing more debt or employee options that vest on merger.
Other tactics include the people poison pill for key resignations, golden parachutes providing executive benefits upon termination, or the Pac-Man defense where the target buys shares in the acquirer.
Hostile Takeover Examples
Take Carl Icahn's 2011 attempts on Clorox: he made three bids, but the board rejected them, introduced a shareholder rights plan, and thwarted his proxy fight, ending without a takeover. On the success side, Sanofi's acquisition of Genzyme involved rebuffed friendly offers, so Sanofi went to shareholders with premiums and contingent value rights, ultimately securing the deal to expand into rare disease treatments.
Frequently Asked Questions
You might wonder how a hostile takeover is executed: it can involve tender offers needing majority shareholder acceptance, proxy fights to replace board members, or buying stock openly to gain control. To preempt one, management can issue stocks with differential voting rights, prioritizing higher dividends for lower-vote shares to attract investors while retaining control.
A poison pill is a shareholder rights plan defending against takeovers in forms like flip-in or flip-over dilutions. Other defenses include crown jewel asset sales, golden parachutes, and Pac-Man stock purchases in the acquirer.
The Bottom Line
In summary, a hostile takeover is an attempt to buy controlling shares or oust management to gain influence, often because the acquirer sees undervaluation or wants assets like brands or technology—sometimes driven by activists seeking changes. You now have the key facts on how these work and how companies fight back.
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