Definition
A hostile takeover is a type of acquisition in the corporate world where a company attempts to gain control of another company without the agreement of the target company’s board of directors. This is usually achieved by buying a majority of publicly sold shares on the open market or by persuading shareholders directly to sell their shares to the aspiring acquirer. It’s considered “hostile” because the management of the target company often resists these takeover attempts.
Key Takeaways
- A Hostile Takeover refers to the acquisition of one company (the target) by another (the acquirer) against the wishes of the target’s management and board of directors.
- In a Hostile Takeover, the acquirer company generally purchases a majority stake of the target company’s shares in the open market or by using strategies like a tender offer, proxy fight, or through shareholder activism.
- Though Hostile Takeovers can result in increased competition or monopolistic practices, they may also lead to improved management and operations in the target company, depending on the competence of the acquirer’s management.
Importance
A Hostile Takeover is a significant finance term and procedure for multiple reasons.
It refers to the acquisition of a company, where the proposed buyer attempts to seize control without the consent or agreement of the target company’s existing board of directors.
While considered aggressive, this strategy serves as a means to ensure market competition, break up monopolies, and potentially optimize the economic efficiency of the target company.
It creates a sense of alertness, compelling the management of the target company to perpetually deliver high performances since poor stock performance can make a company an easy target.
Hence, all these aspects make the concept of a hostile takeover an important aspect of corporate finance and strategy.
Explanation
A Hostile Takeover is a strategic method mainly used in corporate finance for acquisition purposes. This strategy is executed when a company wants to take over another company, but the management or board of directors of the target company strongly opposes the takeover proposal. A hostile takeover is an aggressive attempt to gain control, primarily with the objective of restructuring the target company and making it more profitable or valuable.
The acquiring company, in such scenarios, goes directly to the shareholders and tries to persuade them to sell their shares or vote in favor of the takeover. Hostile takeovers serve multiple purposes. Often, the acquiring company believes that the target company is undervalued or that synergies could be created, leading to increased profitability.
The acquiring company could also be looking to eliminate competition, expand operational capacity, or gain access to new markets and technologies. Despite being seen as aggressive, hostile takeovers can serve as a valuable market mechanism. They can help replace inefficient management, driving improved performance while increasing shareholder value of the target company.
Its purpose lies in creating value – either for the acquiring company, or for both companies in case the takeover turns friendly.
Examples of Hostile Takeover
Kraft Foods and Cadbury: Perhaps one of the most famous hostile takeovers in recent years was the 2010 acquisition of British candy company Cadbury by American food conglomerate Kraft Foods. Despite strong objections from Cadbury’s management and concerns over potential job losses, Kraft was able to successfully gain a controlling stake in Cadbury.
Oracle and Peoplesoft: In a lengthy hostile takeover that spanned from 2003 to 2005, American technology company Oracle sought to acquire its competitor, the business software maker Peoplesoft. Peoplesoft repeatedly rejected Oracle’s offers and sued the company to prevent the takeover, but Oracle eventually prevailed and successfully acquired Peoplesoft.
Mittal Steel and Arcelor: In 2006, Indian steel magnate Lakshmi Mittal’s company Mittal Steel launched a hostile bid for European steel company Arcelor. Arcelor initially resisted the takeover and sought alternative mergers, but following a prolonged battle, Mittal Steel was able to acquire Arcelor. Thus, ArcelorMittal, the largest steel company in the world, was born.
FAQs on Hostile Takeover
What is a hostile takeover?
A hostile takeover is a type of acquisition where the company being purchased doesn’t want to be purchased, or doesn’t want to be purchased by the particular buyer that is making the bid. This can happen when the acquiring company bypasses the board of directors and purchases the necessary amount of company shares on the open market.
How does a hostile takeover work?
In a hostile takeover, the bidder seeks to acquire the target company either by making a tender offer directly to shareholders or by fighting to replace management to get the acquisition approved. The acquirer tries to persuade shareholders to sell their shares by offering a price higher than the current market price.
What are the types of hostile takeovers?
There are three types of hostile takeovers: the tender offer, the proxy fight, and the backdoor merger. The tender offer involves buying the outstanding stock of the targeted company at a set price, usually higher than market value, to entice shareholders. The proxy fight involves persuading shareholders to use their shareholder votes to install new management or board members who are open to the takeover. The backdoor merger happens when the acquiring company secretly buys enough stock to have controlling interest.
What is a defense against hostile takeover?
There are several defense strategies against hostile takeovers. These include the white knight strategy, where a more favorable company takes over; the poison pill strategy, which dilutes the stock value making it less attractive; and the golden parachute strategy, which involves large benefits to executives upon a takeover.
What are the effects of a hostile takeover?
Hostile takeovers can lead to a dramatic change in management, loss of jobs, and can sometimes bring about a change in the company’s business strategy. However, it can also lead to increased shareholder value and improved company performance if the acquiring company is able to improve operations.
Related Entrepreneurship Terms
- Mergers and Acquisitions
- Shareholder Rights Plan (Poison Pill)
- Tender Offer
- Golden Parachute
- White Knight
Sources for More Information
- Investopedia: This website provides a wide range of information on financial topics, including hostile takeovers.
- Corporate Finance Institute: An educational platform that offers detailed articles and courses on finance-related topics like hostile takeovers.
- Bloomberg: Known for its comprehensive coverage of financial news, Bloomberg often reports on hostile takeovers.
- Forbes: This global media company focuses on business, investing, technology, entrepreneurship, leadership, and lifestyle; including topics related to hostile takeovers.
