The target company's management does not approve of the deal in a hostile takeover. This type of bid occurs when an entity attempts to take control of a firm without the consent or cooperation of the target firm's board of directors. In lieu of the target company's board approval, the would-be acquirer may then:.
When a company, investor, or group of investors makes a tender offer to purchase the shares of another company at a premium above the current market value CMV , the board of directors may reject the offer. The acquirer can approach the shareholders, who may accept the offer if it is at a sufficient premium to market value or if they are unhappy with current management.
The Williams Act of regulates tender offers and requires the disclosure of all-cash tender offers. In a proxy fight, opposing groups of stockholders persuade other stockholders to allow them to use their shares' proxy votes. If a company that makes a hostile takeover bid acquires enough proxies, it can use them to vote to accept the offer. The sale of the stock only takes place if a sufficient number of stockholders, usually a majority, agree to accept the offer.
To deter the unwanted takeover, the target company's management may have preemptive defenses in place, or it may employ reactive defenses to fight back.
To protect against hostile takeovers, a company can establish stocks with differential voting rights DVRs , where a stock with less voting rights pays a higher dividend. This makes shares with a lower voting power an attractive investment while making it more difficult to generate the votes needed for a hostile takeover if management owns a large enough portion of shares with more voting power.
Establishing an employee stock ownership program ESOP involves using a tax-qualified plan in which employees own a substantial interest in the company. Employees may be more likely to vote with management. As such, this can be a successful defense. In a crown jewel defense, a provision of the company's bylaws requires the sale of the most valuable assets if there is a hostile takeover, thereby making it less attractive as a takeover opportunity.
This line of defense is officially known as a shareholder rights plan. It allows existing shareholders to buy the newly issued stock at a discount if one shareholder has bought more than a stipulated percentage of the stock, resulting in a dilution of the ownership interest of the acquiring company.
The buyer who triggered the defense, usually the acquiring company, is excluded from the discount. The term poison pill is often used broadly to include a range of defenses, including issuing additional debt, which aims to make the target less attractive, and stock options to employees that vest upon a merger.
Sometimes a company's management will defend against unwanted hostile takeovers by using several controversial strategies, such as the people poison pill, a golden parachute, or the Pac-Man defense. A people poison pill provides for the resignation of key personnel in the case of a hostile takeover, while the golden parachute involves granting members of the target's executive team with benefits bonuses, severance pay, stock options, among others if they are ever terminated as a result of a takeover.
The Pac-Man defense has the target company aggressively buy stock in the company attempting the takeover. A hostile takeover can be a difficult and lengthy process and attempts often end up unsuccessful. For example, billionaire activist investor Carl Icahn attempted three separate bids to acquire household goods giant Clorox in , which rejected each one and introduced a new shareholder rights plan in its defense.
The Clorox board even sidelined Icahn's proxy fight efforts, and the attempt ultimately ended in a few months with no takeover. An example of a successful hostile takeover is that of pharmaceutical company Sanofi-Aventis's SNY acquisition of Genzyme. Genzyme produced drugs for the treatment of rare genetic disorders and Sanofi-Aventis saw the company as a means to expand into a niche industry and broaden its product offering.
By doing so, the prospective buyer can then convince those individuals to vote for board and executive member replacements who are more likely to approve of the acquisition. Pros: Pushing out opposing members of the board or executive team makes the takeover more likely and allows the acquirer to install new members who support the change in ownership.
Cons: It can be difficult to rally shareholder interest and support. Plus, proxy solicitors can challenge the votes, which extends the timeline. There are several hostile takeover defense strategies that target companies can use to prevent unwanted acquisitions. This preemptive defense strategy involves establishing stocks with differential voting rights, meaning shareholders have fewer voting rights than management.
If shareholders must own more shares to cast votes, a takeover becomes a more costly endeavor. Pros: This approach gives executive employees the most powerful influence over voting results. Another preemptive defense strategy is to create a tax-qualified plan that grants employees more substantial interest in the company.
The idea is that employees are more likely to vote for management rather than support a hostile buyer. Likely the most famous defense against hostile takeovers, the poison pill strategy aims to make takeovers expensive enough to deter buyers. The plan excludes the hostile bidder from the discounted price, making it difficult for the buyer to obtain a controlling share without a steep cost. Pros: The poison pill strategy can discourage current hostile buyers and future takeovers, or at least grant the target company more favorable terms for the acquisition.
Cons: This approach is unlikely to deter persistent or knowledgeable acquirers, and may cause significant damage to the company if implemented incorrectly.
As a counter strategy, the Pac-Man defense works best when the companies are of similar size. Cons: This strategy requires substantial resources and is extremely costly for the organization and its shareholders. In the event of a merger or acquisition, a golden parachute contract guarantees substantial benefits for major executives of the target company who are let go as a result of the deal.
These contracts can sometimes deter hostile bidders, but at the very least provide security for management. Pros: Companies can combine this approach with other strategies to further discourage hostile buyers. As such, many companies will seek a friendly third-party company, often referred to as a white knight, to buy their assets. However, clarity on who to protect, when and how is a key consideration.
Courts typically want to balance shareholder and management interest, but this is not possible all the time and often things skew to protecting management at the expense of shareholders. Myers Squibb to weaken their anti-takeover defenses to ensure the balance does not tilt only towards the company management.
All publicly traded companies generally deploy at least one anti-takeover mechanism by adopting shareholder rights plans. An effective attack strategy for a hostile takeover entails organizing yourself, understanding the Target, evaluating legal pitfalls, preparing the arsenal, disarming defenses, and finally launching the attack using one of the methods mentioned above.
Finally, pick the right attack strategy for your deal and run a wargaming exercise to test all assumptions at play. While a comprehensive vulnerability assessment can be a daunting task, corporate vulnerabilities toward a hostile takeover are also constantly shifting, requiring constant analysis.
In addition to the above areas, companies should pay attention to the specific hostile takeover patterns in the market. Many times, these are early warning signs of emerging hostile takeovers. In general, there are fewer companies that embark on hostile takeover attempts than companies who have been on the receiving end; therefore, there are historically more avenues to deploy towards defending against these attempts.
Defense mechanisms are designed and deployed by organizations by using specialty killer bees and testing periodically. There are multiple kinds of defensive strategies and tactics deployed in tandem or independently; they can be categorized into preventive defense, active defenses, evasive maneuvers, suicidal defenses, and offensive defenses.
While each one has varying degrees of risk, impact, and survival odds, organizations often enlist a combination of these. Preventive defenses are designed to reduce the likelihood of a financially successful hostile takeover, making it more difficult. They are a combination of early warning signs, tight controls or agreements, and event-based triggers called poison pills.
Let us examine a few of them in a bit more detail to understand them better. Subsequently, many variants of poison pills have evolved and been deployed. The active defenses are triggered only after the bid has been made. With this timing in mind, they are more reactive, expensive, and risky. Active defenses also come with higher opportunity costs, making them a significant distraction for executives and boards.
Initiate court proceedings against the hostile Acquirer to stall the bid, increase bid costs, and buy more time to activate other defenses. Self-Tender is, as the name describes, the Target purchasing paid up shares from other shareholders by sums exceeding share capital to increase the relative voting power of friendly shareholders.
Greenmail refers to the payment of a substantial premium for large shareholder stock in return for not initiating a bid for company control. The tax aspects present obstacles for this, as the statute also warrants shareholder approval to repurchase beyond a certain number of shares.
Standstill agreement is an undertaking by the Acquirer not to acquire any more shares of the Target within a certain time. It should be noted the Standstill Agreement is usually deployed with Greenmail. The evasion and negotiation techniques are usually applied along with active defenses; some literature even considers them a subset of active defenses.
However, they are applied differently and need bidders, allies, and favorable scenarios to play out. Let us explore the theory of Knights below. White Squires are typically not interested in acquiring management control of the Target, but are interested in the Target either as an investment or to gain board seats at the Target company.
A company once attempting a takeover, but comes back discussing a merger with the Target company. The Harvard Law School Forum on Corporate Governance predicts another wave of hostile takeovers in the wake of the crisis. Even though the major stock market indexes recovered early from the effects of the pandemic, it argues, many companies continued to suffer from depressed share prices that leave them vulnerable to a hostile takeover.
Investing Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification.
I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What Is a Hostile Takeover Bid? A tender offer is a direct approach to shareholders to sell their shares to the would-be acquirer at a premium over the current market price. A proxy fight is a campaign to get shareholder support for the replacement of board members with advocates of the takeover. A would-be acquirer also can buy shares on the open market.
0コメント