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written by | September 13, 2022

Hostile Takeover - Meaning, Types and Strategies

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A hostile takeover is a type of corporate takeover which occurs when a bidder acquires a target company by going directly to the target's shareholders, bypassing the board of directors. A hostile takeover can be effected through a tender offer, open market purchase, or other means.

Hostile takeovers can be a hostile and dangerous process for a company. It is often used as a way to take over a company by another company or individual hostilely.

However, according to a 2013 study by the Harvard Business School, the average rate of hostile takeovers globally was about 2.5% annually from 1980 to 2010. This means that, on average, about 2.5 companies per 100 would become victims of a hostile takeover in any given year.

Did you know?

Only once in Indian history has a hostile takeover resulted in the acquirement of a target by a hostile bidder, when BV Raju sold his stake in Raasi Cements to India Cements in 1998.  

Also read: Smart Recruiting Strategies for Hiring Employees for Businesses

What are Hostile takeovers?

When a company attempts to take over another company, it is called a hostile takeover. This can happen when the board of directors of the target company does not want to be taken over, but the acquiring company is persistent. Hostile takeovers can be hostile for a variety of reasons. The target company may feel that the acquirer is trying to take advantage of a situation, such as a weak economy, to get a bargain price for the company. The target company may also feel that the acquirer is trying to take control of the company without paying a fair price.  

In many cases, hostile takeovers are driven by the acquirer’s desire to take advantage of the target company. For example, if the target company is struggling financially, the acquirer may try to take over the company at a lower price. Hostile takeovers can also be a way for a company to take control of another company without paying a fair price. In some cases, the acquirer may even try to eliminate a competitor by taking over the target company.

Types of Takeovers: Hostile vs Friendly

There are two types of takeovers: hostile and friendly

A company's management does not want to be acquired in a hostile takeover and resists the attempt. In a friendly takeover, a company's management supports the acquisition.

Hostile takeovers are typically done through a tender offer, in which the acquiring company makes an offer to buy shares of the target company at a premium to the current market price. The offer is usually made directly to the target company's shareholders. If the offer is accepted, the acquiring company will then attempt to replace the target company's management with its own.

Friendly takeovers are typically done through a negotiated transaction, in which the acquiring company and the target company's management agree on the terms of the acquisition. The target company's shareholders then vote on the transaction. If the transaction is approved, the acquiring company will then take control of the target company.

Why Have Hostile Takeovers Become Common Nowadays?

There are several reasons why hostile takeovers have become more common in recent years. First, the globalisation of the economy has made it easier for companies to operate in multiple countries and to raise capital internationally. This has made it easier for hostile bidders to find the financing necessary to make an aggressive offer.

Second, the growth of the private equity industry has also made hostile takeovers more common. Private equity firms are often willing to pay large premiums for target companies, which makes them more likely to succeed in a hostile bid.

Third, the increased use of shareholder activism has made it easier for hostile bidders to find support from other shareholders. Activist investors are often willing to back a hostile bid to force changes at the target company.

Fourth, increased derivatives have made it easier for hostile bidders to hedge their risk. Derivatives can offset the risk of a hostile offer failing, making hostile bids more attractive to potential bidders.

Hostile takeovers get initiated by people or groups unsatisfied as corporate shareholders. It is not always started through existing corporations to eliminate competition. Low-interest rates make borrowing money cheaper, making it easier to make a hostile bid.

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Why are Hostile Takeovers Not Advantageous for the Acquiring Company

There are a few disadvantages of hostile takeovers for the acquiring company. 

First, hostile takeovers are often expensive, and the acquiring company may have to take on a large amount of debt to finance the takeover. 

Second, hostile takeovers can be time-consuming and distracting for the acquiring company's management, which may have to spend a lot of time and energy defending against the takeover attempt. 

Third, hostile takeovers can create animosity and bad feeling between the employees of the two companies, which can lead to a decline in morale and productivity. 

Finally, hostile takeovers can be bad for the image of the acquiring company and may make it difficult to win customers and business partners in the future.

Offensive Strategies for Hostile Takeovers

There are various mechanisms like proxy fights or tender offers which a company would leverage for hostile takeover. Hostile takeovers occur when a company sets sights on buying another company apart from objections from the target company’s board of directors. 

1. Pre-emptive offer: A pre-emptive offer is an offer to buy a company before another company makes an offer. This type of offer is often made to prevent a hostile takeover. Pre-emptive offers are usually made at a premium to the current market price for the target company. This makes it more difficult for another company to make a competing offer.

2. Front-end loaded offer:  A front-loaded offer is an offer to buy a company at a price that is significantly higher than the current market price. This type of offer is often made to prevent a hostile takeover. Front-loaded offers are usually made at a premium to the current market price for the target company. This makes it more difficult for another company to make a competing offer.

3. Reverse merger: In a reverse merger, a private company acquires a public company. The private company essentially takes over the public company, and as a result, the private company becomes public. Reverse mergers are often used as a way for private companies to go public without going through an initial public offering (IPO). They are also often used as a way for companies to avoid the time and expense associated with an IPO. However, reverse mergers can also be risky. Going public can be complex and costly for a private company. For a public company, being acquired can mean giving up control of the company.

4. Tender offer: A tender offer is an offer to buy a company at a price that is significantly higher than the current market price. This type of offer is often made to prevent a hostile takeover. Tender offers are usually made at a premium to the current market price for the target company. This makes it more difficult for another company to make a competing offer.

5. Proxy fight: A proxy fight is a type of hostile takeover in which the acquiring company tries to replace the target company's board of directors with its nominees. Proxy fights are often initiated by activist investors who are unhappy with how the target company is managed. They may also be initiated by companies that are interested in acquiring the target company. Proxy fights can be an effective way to take over a company. However, they can also be risky. The acquiring company may be left with a large debt if the proxy fight is unsuccessful.

Defensive Strategies for Hostile Takeovers

1. Pre-emptive defense: Pre-emptive defences are measures a company can take to make itself ineffective to potential acquirers. One common pre-emptive defence is to increase the company’s debt levels, which makes the company less attractive to potential acquirers. Other pre-emptive defences include adopting poison pill provisions and giving employees an ownership stake in the company.

2. Leveraged recapitalisation: Leveraged recapitalisation is a strategy a company can use to make itself unappealing to potential acquirers. In a leveraged recapitalisation, the company increases its debt levels and uses the additional debt to repurchase shares. This makes the company unattractive to potential acquirers because it increases its debt-to-equity ratio and makes it less profitable.

3. Management buyouts: Management buyouts are a strategy a company can use to prevent itself from being acquired by another company. The company’s management team buys out the company in a management buyout. This makes the company less effective for potential acquirers because it makes the company privately held.

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4. Employee stock ownership plans: Employee stock ownership plans are a strategy a company can use to make itself less useful to potential acquirers. In an employee stock ownership plan, the company gives employees an ownership stake in the company. 

5. Poison pill provisions: Poison pill provisions are provisions that a company can adopt to make it more difficult or expensive for an acquirer to complete a hostile takeover. Poison pill provisions can include staggered boards and golden parachutes. Staggered boards make it more difficult for an acquirer to replace the company’s board of directors. Golden parachutes provide incentives for a company’s management team to resist a hostile takeover.

Examples of Hostile Takeovers.

1. Burger King's acquisition of Tim Hortons

In 2014, Burger King acquired Tim Hortons, a Canadian coffee and doughnut chain, in an 9,08,32,35,00,000 hostile takeover. The deal created the world's third-largest fast food company.

2. Pfizer's acquisition of Wyeth

In 2009, Pfizer acquired Wyeth, a pharmaceutical company, in a ₹5,414,764,180,000.00 hostile takeover. The deal made Pfizer the world's largest pharmaceutical company.

3. Kraft's acquisition of Cadbury

In 2010, Kraft acquired Cadbury, a British confectionery company, in a ₹15,61,83,58,00,000 hostile takeover. The deal made Kraft the world's largest confectionery company.

4. Comcast's acquisition of NBCUniversal

In 2011, Comcast acquired NBCUniversal, a media and entertainment company, in a ₹23,90,56,50,00,000.00 hostile takeover. The deal made Comcast the largest media and entertainment company in the world.

5. AT&T's acquisition of Time Warner

In 2018, AT&T acquired Time Warner, a media and entertainment company, in an ₹68,05,14,17,00,000 hostile takeover. The deal made AT&T the world's largest media and entertainment company.

Also read: Types of Work Shifts And How Many Work Shifts Your Small Business Needs

Conclusion

Hostile takeovers can be very detrimental to small businesses and MSMEs. The uncertainty and publicity surrounding a hostile takeover can damage the company's reputation and make it difficult to attract customers and partners. The new owners may also make changes to the company that is not in the best interests of the small business or MSME, such as downsizing or selling off assets. If you are a small business or MSME owner, it is important to be aware of the risks of a hostile takeover and take steps to protect your business.

There are several steps that small business owners can take to prepare for a hostile takeover. Firstly, it is important to understand your company's financial situation and be aware of any vulnerabilities that a potential buyer could exploit. Secondly, you should put together a team of trusted advisors who can help you navigate the takeover process. Finally, you should have a plan in place for how you will respond to a hostile takeover attempt, including how you will communicate with employees and shareholders. 

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: How do you remove a hostile takeover?

Ans:

Some companies may attempt to remove a hostile takeover by adopting a "poison pill" defence, which makes the company less attractive to potential acquirers.

Q: How do you profit from a hostile takeover?

Ans:

Some people may attempt to profit from a hostile takeover by buying shares of the company being targeted in the hopes that the takeover attempt will be successful and the value of the shares will increase.

Q: How often are hostile takeovers successful?

Ans:

There could be various factors, such as the size of the company being targeted and the financial resources of the company attempting the takeover. Generally, however, it is estimated that around 10-15% of hostile takeover attempts are successful.

Q: Is a hostile takeover ethical?

Ans:

It depends on person to person. Some people may view a hostile takeover as being unethical because it involves taking control of a company without the consent of the company's board of directors. Others may view a hostile takeover as being a perfectly acceptable way to conduct business.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.