Definition and Examples of Hostile Takeovers
A hostile takeover occurs when a company is acquired without the consent of its leadership. In a traditional acquisition, the two companies work together to agree on a deal, and the target company’s board of directors would sign off.
But if the target company’s leadership isn’t receptive to a sale, the acquiring company would go directly to the shareholders, usually with a tender offer, or an offer to purchase shares at a premium. When they purchase enough shares to have a controlling interest in the company, the hostile takeover is successful.
A famous example of a tender offer took place in 2010 when the French biotech company Sanofi-Aventis offered to purchase the U.S. biotech company Genzyme. Genzyme’s leadership declined, and so Sanofi took its bid directly to the shareholders. The acquisition was completed in 2011.
Hostile takeovers first became popular during the 1980s. Throughout the decade, there were hundreds of unsolicited takeover attempts, and companies lived in fear of such a thing happening to them. This culture of hostile takeovers even influenced the perception of corporate America during those years.
Many states responded by implementing laws to prevent hostile takeovers. In 1987, the U.S. Supreme Court upheld such a law, and by 1988, 29 states had hostile takeover statutes on the books. Control share acquisition statutes were in effect in 25 states as of 2020.
How Hostile Takeovers Work
A company may resort to a hostile takeover if the target company’s management isn’t open to acquisition bids. There are two primary strategies a company uses to complete a hostile takeover: a tender offer and a proxy fight.
A tender offer is when the hostile bidder bypasses the company’s leadership and offers to purchase shares directly from shareholders, usually for more than their current market value. Each shareholder decides for themselves whether to sell their stake in the company. The bidder’s goal is to buy enough shares to have a controlling stake in the company. Tender offers are regulated by the Securities and Exchange Commission (SEC).
A proxy fight or proxy contest is when the hostile bidder attempts to replace members of the target company’s board. The goal is to get enough members on the board who will agree to the sale.
Proxy fights are less likely to be successful, since shareholders often vote with the company’s management, making it difficult to replace board members.
An example of a proxy fight took place between Microsoft and Yahoo! in 2008. Microsoft had offered to purchase Yahoo!, which Yahoo!’s board rejected because it felt the offer undervalued the company. In return, Microsoft launched a proxy fight, attempting to nominate its own directors to Yahoo!’s board. The takeover was ultimately unsuccessful when Microsoft abandoned its goal of acquiring Yahoo! just a few months later.
Hostile Takeover vs. Friendly Takeover
The opposite of a hostile takeover is considered a friendly takeover, also known as a merger. In this type of acquisition, the acquiring company and target company both sign off on the deal. In the table below, we’ll lay out the similarities and differences between the two transactions.
|Similarities Between a Hostile and Friendly Takeover||Differences Between a Hostile and Friendly Takeover|
|Both hostile and friendly takeovers combine two separate companies into a single firm.||In a friendly takeover, the target company agrees to be acquired. In a hostile takeover, it doesn’t.|
|Both hostile and friendly takeovers can be either positive or negative for individual shareholders.||Hostile takeovers often result in an acquisition premium, meaning the acquiring company pays more per share than they would in a friendly takeover.|
How Companies Prevent Hostile Takeovers
Many companies have developed defensive strategies to help prevent hostile takeovers. These strategies, known as poison pills or shareholder rights plans, are designed to make the takeover more difficult, more expensive, or less attractive to the hostile bidder.
The most common type of poison pill is known as a flip-in poison pill, which is automatically triggered when a hostile bidder gains a certain percentage of shares in the target company. When triggered, this poison pill gives all shareholders except for the hostile bidder the right to purchase additional shares at a discounted price.
This move dilutes the hostile bidder’s ownership in the company by flooding the market with shares. As a result, it becomes more expensive to take over the company.
While they’re effective at preventing hostile takeovers, poison pills can be disadvantageous for individual investors. They flood the market with new shares, diluting the ownership of all shareholders and requiring investors to spend more money to maintain their current stake in the company.
What It Means for Individual Investors
As an investor, it’s possible that you would be affected by a hostile takeover. But the exact impact is unique to each situation. First, hostile takeovers aren’t necessarily negative for shareholders. In fact, they can be positive by increasing share prices for both the target and acquiring companies. And since hostile takeovers often involve the hostile bidder buying shares at a premium, this type of transaction could be profitable for you if you sell your shares.
That being said, if you decide to hold on to your shares after the hostile takeover, there’s no way to predict the long-term effects on the company’s performance or share prices.
- A hostile takeover is when one company acquires another without the consent of the target company’s leadership.
- A hostile takeover usually takes the form of a tender offer, where the hostile bidder offers to buy shares directly from shareholders, usually at a premium price.
- Hostile takeovers can also be proxy fights, where the hostile bidder attempts to replace board members with those who will sign off on the sale.
- Companies may prevent a hostile takeover using a poison pill, which makes it more difficult, more expensive, or otherwise less desirable to acquire the target company.
U.S. Securities and Exchange Commission. "Sanofi-Aventis Completes Acquisition of Genzyme Corporation."
FindLaw. "CTS Corp. v. Dynamics Corp. of America."
Eric S. Rosengren. "State Restrictions of Hostile Takeover." Publius, Vol. 18, No. 3, Summer, 1988, Pages 67-79.
U.S. Securities and Exchange Commission. "Control Share Acquisition Statutes."
Investor.gov. "Tender Offer."
U.S. Securities and Exchange Commission. "Microsoft Sends Letter to Yahoo! Board of Directors."
Microsoft. "Microsoft Withdraws Proposal to Acquire Yahoo!"