A hostile offer is a specific type of takeover offer that bidders make directly to the shareholders of the target business, because management is not in favor of the deal. Bidders generally present their hostile offers through a takeover bid. In this scenario, the acquiring company offers to buy the target’s common stock at a substantial premium.
Break down a hostile offer
Hostile offers can lead to major changes in the organizational structure. If a board of directors pursues defensive action to stop the merger, a proxy fight may occur. In this scenario, the acquirer will often try to convince the target shareholders to replace management.
The acquirer and the target company use various solicitation methods to influence shareholder votes. The shareholders receive a table 14A containing financial and other information on the target company and the conditions of the proposed acquisition. In many cases, the acquiring company hires an external proxy firm which draws up a list of shareholders and contacts them to present the case of the acquirer. The company can call or provide written information, detailing why the acquirer is trying to make fundamental changes and why the transaction could create more wealth for shareholders in the long term.
Individual shareholders or brokerages submit their votes to the entity responsible for aggregating the information (for example, a transfer agent or a brokerage). The general secretary of the target company receives all the votes before the general meeting. Prosecutors may examine and contest the votes if they are not clear.
Carl Icahn is one of the best performing investors. Icahn became famous in the 1980s through a series of hostile offers, takeovers, and attempted takeovers from some of America’s largest American companies, including Texaco, TWA, and American Airlines.
Recent example of a hostile offer
A recent example of a hostile offer is the lawsuit by EchoStar Corp. from Inmarsat Plc., A London-based satellite operator. The UK has specific rules for hostile takeovers, and as soon as news of EchoStar Corp’s approach comes. was released in May 2020, it triggered a 28-day period for the company to make a final offer or move away from the agreement.
In a shortened period, EchoStar announced its offer of 2.45 billion pounds (3.2 billion dollars), half in cash and half in EchoStar shares; however, the board of directors of Inmarsat rejected it. The rejection was mainly due to the low premium (27%) offered by EchoStar on its share price. In order for a hostile takeover to take place in this case, the bidder had to offer a higher premium.