How hostile takeovers work
The opposite of a friendly takeover, a hostile takeover is when a company acquires a target company against the wishes of the target's board of directors.
By AnsaradaFri Sep 20 2024Mergers and acquisitions, Post-deal integration
A hostile takeover is a type of acquisition where the target company, the one being acquired, does not cooperate with the acquiring company to work cooperatively towards an outcome. To complete a hostile takeover, a company must acquire and control more than half the voting shares of the target company.
Ideally, mergers and acquisitions are completed with dialogue and cooperation between both parties to work towards the outcome. However, there are circumstances where the board of the target company is opposed to the acquisition.
For example:
The first two strategies are more likely to be successful if the company is established and has a record of underperformance. Existing shareholders may be more open to accepting a takeover or to change at the board and management level where company performance could be improved.
If successful, current board members who oppose the acquisition are replaced with representatives of the acquiring company.
The acquiring group must declare once a set ownership threshold is reached. This requirement may trigger a defence strategy as the target company’s board and management resist the acquisition.
No matter which strategy is used, mastering acquisitions requires thorough preparation and tools that enable a clear view of every key moment of the takeover.
Examples of these defences include:
For companies resisting a hostile takeover where the above defences are not effective, there are a few more options:
Each side of a hostile takeover may spread negative sentiment to damage the reputation of the other party during the takeover, with a flow-on effect on staff, management and overall company culture. Repairing culture and setting the organisation up for success following a hostile takeover will require strategic communication, clear policy and a clear plan for the path forward.
Programmatic M&A is a strategy that uses smaller acquisitions to accumulate and produce value and increase profits over time. Smaller target companies may be less likely to defend against takeover and provide an opportunity for consistent and strategic growth in profit.
To realise profits following a hostile takeover it’s essential to plan your post-deal integration to ensure that employees remain engaged and desired outcomes remain on track.
Ideally, mergers and acquisitions are completed with dialogue and cooperation between both parties to work towards the outcome. However, there are circumstances where the board of the target company is opposed to the acquisition.
Reasons for pursuing a hostile takeover
A hostile takeover may take place when the acquiring company decides to pursue the acquisition for financial or other business reasons.For example:
- The acquiring company may believe that the target company is undervalued.
- There is business value in controlling that company’s brand, industry foothold, intellectual property, technology or other resources.
- Activist investors may make a strategic move to instigate change in the company's operations.
Are hostile takeovers legal?
Hostile takeovers are legal, however many legal barriers to a hostile acquisition may arise during the takeover. Completing regulatory due diligence is essential for acquiring companies to be prepared ahead of a hostile takeover process.How to do a hostile takeover
A hostile takeover often begins as a friendly offer, which is then refused by the board members and management. The takeover becomes hostile when the acquiring company goes directly to the shareholders.The first step in a hostile takeover
After initially attempting negotiation with the board of directors and management to persuade them to agree to the acquisition, the next step is to choose from three pathways that can force the deal.The first two strategies are more likely to be successful if the company is established and has a record of underperformance. Existing shareholders may be more open to accepting a takeover or to change at the board and management level where company performance could be improved.
1. Tender offer
The acquiring company approaches shareholders and offers to purchase shares at a premium price, with the offer available for a limited time. The takeover is successful once the acquiring company holds the majority of the target company shares.2. Proxy fight
The acquiring company pitches shareholders to convince them to vote their proxy in favour of their nominations to replace current members of the board of directors.If successful, current board members who oppose the acquisition are replaced with representatives of the acquiring company.
3. Stock purchases
The acquiring company or group of investors purchases shares in the open market to gain influence or control of the target company.The acquiring group must declare once a set ownership threshold is reached. This requirement may trigger a defence strategy as the target company’s board and management resist the acquisition.
No matter which strategy is used, mastering acquisitions requires thorough preparation and tools that enable a clear view of every key moment of the takeover.
Defences to a hostile takeover
The target company may resist a hostile takeover. Acquiring entities need to complete due diligence to be prepared in the event of resistance to an acquisition. Some defences to a hostile takeover need to be put in place well before the takeover bid arises to be effective.Examples of these defences include:
- Differential voting rights: some shares carry greater voting power than others. Typically shares with less voting power are made attractive with a higher dividend.
- Employee stock ownership: employees own a substantial interest in the company. This can be invalidated where the plan benefits management and not shareholders.
- Staggered board: service terms of board members may be tiered so only a few positions are open to election each year. This protects against a hostile takeover by proxy fight.
- Greenmail: providing there is no clause preventing it, the company may buy shares at an inflated price from an investor to eliminate their influence. Provisions may prevent this as this strategy can be viewed as protecting the management at the expense of shareholders.
- Poison pill: a stockholder rights plan enables existing shareholders to increase their holding at a discount, diluting share value in an attempt to limit the ability of the hostile takeover to complete.
- Golden parachute: employment contracts guarantee expensive benefits to key management if they are removed, to make acquisition prohibitively expensive.
For companies resisting a hostile takeover where the above defences are not effective, there are a few more options:
- White knight: in white knight M&A, the target company finds a more attractive buyer to acquire the company or a large investor.
- Defensive merger: the target company acquires large debts to try to acquire another company, making itself less attractive to the acquiring company. This strategy carries significant financial risk and may impact shareholders.
- Crown jewel defence: selling the most valuable parts of the target company to make it less attractive.
- Pac Man defence: the target company purchases shares of the acquiring company to attempt a hostile takeover in retaliation. This strategy aims to prevent the hostile takeover proceeding by creating the risk that the acquiring company will lose control of its business. This is an expensive strategy only suitable for companies with significant capital resources.
After a hostile takeover: balancing risk and reward
A hostile takeover does come with risks, particularly for the target company employees. The acquiring company may dramatically change the management and staffing structure to cut costs and improve profitability, cut underperforming business units and streams or shift capital allocation to improve the bottom line.Each side of a hostile takeover may spread negative sentiment to damage the reputation of the other party during the takeover, with a flow-on effect on staff, management and overall company culture. Repairing culture and setting the organisation up for success following a hostile takeover will require strategic communication, clear policy and a clear plan for the path forward.
Is hostile takeover a strategy that is likely to succeed?
A hostile takeover is more likely to be successful when the target company board makes a recommendation to accept an offer at some stage during the process. Alternatively, the bid must be accepted by major shareholders, allowing the acquiring company to take control.Programmatic M&A is a strategy that uses smaller acquisitions to accumulate and produce value and increase profits over time. Smaller target companies may be less likely to defend against takeover and provide an opportunity for consistent and strategic growth in profit.
Hostile takeover success: achieving profitability post-acquisition
According to the University of Cambridge ESRC Centre for Business Research, hostile takeovers tend to improve profitability when compared to non-merging companies. These profits are realised from improvements in operating profit margins and significant asset disposals.To realise profits following a hostile takeover it’s essential to plan your post-deal integration to ensure that employees remain engaged and desired outcomes remain on track.
Get your integration in order with our practical post-acquisition checklist
Post-deal integration, done right. Keep integration activities front of mind as you complete earlier phases of the deal.
Download the checklist
