Hostile Takeover

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What is a hostile takeover bid?

A hostile takeover is the acquisition of a company (called the target company) by another (called the acquirer) which is done by going directly to the shareholders of the company or by struggling to replace management to get approval. ‘acquisition. A hostile takeover can be achieved through a takeover bid or a proxy fight.

The main characteristic of a hostile takeover bid is that the management of the target company does not want the agreement to be concluded. Sometimes, the management of a company defends itself against unwanted hostile takeovers using several controversial strategies, such as the poison pill, defense of the crown jewels, a golden parachute or the Pac-Man defense.

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Hostile takeover

Understanding hostile takeovers

A hostile takeover bid occurs when an entity attempts to take control of a business without the consent or cooperation of the board of directors of the target company. Instead of the approval of the board of directors of the target company, the potential acquirer can then issue a takeover bid, resort to a proxy fight or try to buy the necessary shares of the company on the market. free. To deter unwanted takeovers, the management of the target company may have preventive defenses in place, or they may use reactive defenses to fight back.

The factors involved in a hostile takeover on the acquisition side often coincide with those in any other takeover, such as believing that a company may be significantly undervalued or wanting access to the brand, operations, technology or industry. Hostile takeovers can also be strategic actions by activist investors seeking to change the operations of a business.

Hostile takeovers through offers of offer and proxy fights

When a company, an investor or a group of investors makes a takeover bid to buy the shares of another company at a price higher than the current market value, the board of directors may reject the offer. The absorbing company can transmit this offer directly to the shareholders, who can choose to accept it if it is at a sufficient price compared to the market value or if they are not satisfied with the current management. The sale of the stock only takes place if a sufficient number of shareholders, generally the majority, accept the offer. The Williams Act of 1968 regulates takeover offers and requires the disclosure of all takeover offers in cash.TheThe

In a proxy fight, groups of opposing opponents persuade other shareholders to allow them to use proxy votes for their shares. If a company that makes a hostile takeover bid acquires enough proxies, it can use them to vote to accept the offer.

Preventive defenses against hostile takeovers

To protect against hostile takeovers, a company can establish shares with differential voting rights (DVR), where a share with fewer voting rights pays a higher dividend. This makes shares with low voting power an attractive investment, while making it more difficult to generate the votes necessary for a hostile takeover bid if management has a sufficiently large share of shares with more voting power. Another defense is to establish an employee share ownership program (ESOP), which is a tax-eligible plan in which employees have a substantial interest in the business. Employees are more likely to vote with management, which is why it can be a successful defense. In a crown jewel defense, a provision in the company’s bylaws requires the sale of the most valuable assets in the event of a hostile takeover, which makes it less attractive as a takeover opportunity.

Reactive defenses

Officially known as the shareholder rights plan, a poison defense allows existing shareholders to buy newly issued shares at a reduced price if a shareholder has purchased more than a stipulated percentage of the stock; the purchaser who initiated the defense is excluded from the discount. The term is often used broadly to include a range of defenses, including the issuance of both additional debt to make the target less attractive and stock options for employees who acquire during a merger.

A people pill provides for the resignation of key personnel in the event of a hostile takeover, while Pac-Man’s defense ensures that the target company aggressively buys shares in the company that is trying to take control.

Examples of hostile takeovers

Hostile takeover can be a long and difficult process, and attempts often fail. In 2020, for example, billionaire activist investor Carl Icahn attempted three separate deals to acquire household goods giant Clorox, which rejected each and presented a new shareholder rights plan in its defense.TheThe Clorox board even put aside Icahn’s proxy efforts, and the attempt ended in a few months without taking control. Another classic example that has become a disaster is the fiasco of the takeover of Getty Oil.

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