Offensive and Defensive Strategies for Hostile Takeovers

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Finance professionals brainstorming hostile takeover defense strategies.

When a buyer’s offer to purchase a company is met with disapproval, there’s a chance for the proposed acquisition to turn hostile. Companies on the receiving end of a hostile takeover must employ the right defense strategies to avoid unwanted sales.

Finance teams provide the budgetary insights that the organization’s decision-makers reference when leading offensive and defensive strategies in these situations. Here’s a detailed look at both sides of hostile takeovers.

What qualifies as a hostile takeover of a company?

A hostile takeover occurs when the targeted company’s management or board of directors does not approve of the transaction. With a lack of consent and cooperation from these decision-makers, the acquirer goes directly to the target company’s shareholders to confirm the acquisition.

Reasons for hostile takeovers

Mergers and acquisitions are common endeavors for companies that want to expand their operations, gain new skills and resources, or reduce competition, as well as those receiving pressure from their shareholders to grow the business.

Targeted companies that reject acquisition deals often do so because they feel the bid undervalues the company. Additionally, the bid may fail to convince them of benefits that outweigh the advantages of operating as a standalone business. Executives and boards are likely to question the bidder’s long-term plans and financial prospects. Investopedia noted that companies may also be wary of investors who want to make considerable changes to brand identity, operations, policies, or workforce.

Benefits of hostile takeovers

While the initial proposal may be unfavorable to the targeted company, hostile takeovers have the potential to improve stock prices for both acquirers and targets, according to the Financial Industry Regulatory Authority.

Further benefits of acquiring an organization include increased revenue, enhanced efficiency, and lessened competition. When acquired companies maintain operations, there are greater overall earnings reports for both the acquirer and acquired from the combined revenues.

Costs of hostile takeovers

The downsides of acquisition include the risk of falling stocks and company value and the higher cost of a forced sale. Company morale may also suffer if employee redundancies result in significant layoffs and culture disruptions. Leading a hostile takeover can also have a negative impact on an organization’s reputation.

The offensive strategies

There are two main strategies buyers can use to approach hostile takeovers: tender offer or proxy fight.

Tender offer

A tender offer occurs when the buyer offers to purchase shares at premium value. For example, if the company’s current market price of shares is $10, the acquirer might offer to purchase them for $15, which is a 50 percent premium. If enough shareholders agree to sell their shares, the buyer may acquire a majority stake in the targeted company.

Companies that choose the tender offer approach must follow the rules set forth by the Williams Act. Enacted in 1968, the law requires the acquiring company to disclose its offer terms and purpose, source of funds, and proposed plans if the takeover is successful. It also gives both the prospective buyer and target company ample time to state their cases, and sets deadlines by which shareholders must make their decisions.

Pros: Investors do not have to officially buy the shares until a certain amount are tendered, which eliminates large upfront cash outlays and prevents liquidating stock options in case of failure.

Cons: When successful, tender offers can be costly and time-consuming for investors.

Proxy fight

Also known as a proxy vote or proxy contest, this strategy involves persuading shareholders to support the sale. 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.

The defensive strategies

The target company must determine how to prevent a hostile takeover with approaches that either prepare for the risk of acquisition or react to the prospective buyer’s takeover efforts. There are several hostile takeover defense strategies that target companies can use to prevent unwanted acquisitions.

Differential voting rights

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.

Cons: A decrease in voting rights may upset shareholders.

Employee stock ownership program

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.

Pros: This strategy can increase employee loyalty and satisfaction.

Cons: Hostile buyers can still persuade shareholders in a proxy fight.

Poison pill

Likely the most famous defense against hostile takeovers, the poison pill strategy aims to make takeovers expensive enough to deter buyers. It’s officially known as a shareholder rights plan and allows current stakeholders to purchase new shares at a discounted price. 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.

Pac-Man defense

Target companies may choose to avoid a hostile takeover by buying stock in the prospective buyer’s company, thus attempting a takeover of their own. As a counter strategy, the Pac-Man defense works best when the companies are of similar size.

Pros: Turning the tables puts the original buyer in an unfavorable situation.

Cons: This strategy requires substantial resources and is extremely costly for the organization and its shareholders.

Golden parachute

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.

Cons: This is a controversial strategy that can harm the company’s reputation.

Crown jewel

Employing a crown jewel defense means selling the company’s most profitable assets, reducing its attractiveness to unwanted buyers. This is a risky strategy, as it destroys the company’s value. As such, many companies will seek a friendly third-party company, often referred to as a white knight, to buy their assets. Once the hostile buyer drops the bid, the target company can buy its assets back from the strategically chosen third party.

Pros: The target company becomes a less attractive acquisition.

Cons: This is a high-risk defense. Without a white knight, the company will lose its most valuable assets.

Pursuing an Online MBA with a Finance concentration

When hostile takeovers occur, finance professionals on either side of the conflict need to understand the merger and acquisition strategies that are typically employed in these situations to better advise the organization’s leaders. At the Northeastern University D’Amore-McKim School of Business, Online MBA students can choose the Finance concentration for a detailed understanding of these takeover tactics and defense strategies.

Visit the program website to learn more about how the Online MBA program and the Finance concentration at the D’Amore-McKim School of Business can prepare you for advanced professional success.


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Hostile Takeover by CFI

Hostile Takeover by Investopedia

How Can a Company Resist a Hostile Takeover? by Investopedia/a>

What You Need to Know About Hostile Takeovers by FINRA

Pros and Cons of Acquiring Another Organization by Small Business Chron

Online MBA by Northeastern University D’Amore-McKim School of Business