What Is a Hostile Takeover?

A hostile takeover happens when an entity takes control of a company against the wishes of the company's management. It's an acquisition strategy requiring that the entity acquire and control more than 50% of the voting shares issued by the company.

Understanding Hostile Takeovers

A hostile takeover allows the new majority shareholder(s) to control the acquired business. The company being acquired in a hostile takeover is 🅘called the target company, while the one executing the t꧅akeover is called the acquirer. Reasons that hostile takeovers occur, from the acquiring party's point of view, often coincide with those of any other acquisition or merger, such as:

• A belief that a company may be significantly 澳洲幸运5官方开奖结果体彩网:undervalued
• A desire to access or own a company's brand, operations, technology, or industry foothold
• A strategic move by 澳洲幸运5官方开奖结果体彩网:activist investors looking to effect change in a company's operations

Hostile takeovers are generally initiated in one of two w𝓰ays:

• A 澳洲幸运5官方开奖结果体彩网:tender offer to 澳洲幸运5官方开奖结果体彩网:purchase the voting shares of another company 澳洲幸运5官方开奖结果体彩网:at a premium above the 澳洲幸运5官方开奖结果体彩网:current market value (CMV)
• In a proxy fight, where the entity tries to persuade stockholders to vote out the current management and vote in management that would allow the takeover
  

Defenses Against a Hostile Takeover

To deter unwanted takeovers, companies may have preemptive defenses or employ reactiv𒆙e defenses to fight back. Some of these defenses are:

• Differential voting rights
• Employee stock ownership program
• Crown jewel
• Poison pill

Differential Voting Rights (DVRs)

To protect against hostile takeovers, a company can establish stock with differential voting rights (DVRs), where 澳洲幸运5官方开奖🐲结果体彩网:some shares carry greater voting power than others. This can make 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. Shares with less voting power can also pay a higher dividend, making them more attractive investments.

Employee Stock Ownership Program (ESOP)

Establishing an 澳洲幸运5官方开奖结果体彩网:employee stock ownership program (ESOP) involves using a tax-qualified plan in which employees own a substantial interest in the company. Employees may be mo🍸re likely to vote with management. As such, this can be a successful defense.

However, such schemes have drawn scrutiny in the past. In some cases, courts have invalidated defensive ESOPs on the grounds that the plan was established for the benefit of management, not shareholders.

Crown Jewel

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 is often considered one of the last lines of defense.

Poison Pill

This defense tactic is officially known as 澳洲幸运5官方开奖结果体彩网:a shareholder rights plan. It allows existing shareholders to buy 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.

There are two𓆏 types of poison pill defense๊s: the flip-in and flip-over.

A flip-in allows existing shareholders to buy new stock at a discount if someone accumulates a꧋ specified number of shares of the target company. The acquꦅiring company is excluded from the sale, and its ownership interest becomes diluted.

A flip-over strategy allows the target company's shareholders to purchase the acquiring company's stock at a deeply discounted price if the takeover goes through, which punishes the acquiring company by diluting its equity.

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 澳洲幸运5官方开奖结果体彩网:stock options to employees that vest upon a merger.

Other Strategies

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 澳洲幸运5官方开奖结果体彩网:people poison pill provides for the resignation of key personnel in the case of a hostile takeover, while the 澳洲幸运5官方开奖结果体彩网:golden parachute involves granting members of the target's executive team benefits (bonuses, severance pay, stock options, among others) if they are ever terminated as a result of a takeover. The 澳洲幸运5官方开奖结果体彩网:Pac-Man defense has the target company aggreꦬssively buy stock in the company attempting the takeover.

Hostile Takeover Examples

A 澳洲幸运5官方开奖结果体彩网: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 2011, 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's (SNY) acquisition of Genzyme. Genzyme produced drugs for the treatment of rare genetic disorders, and Sanofi saw the company as a means to expand into a niche industry and broaden its product offering. After friendly takeover offers were unsuccessful as Genzyme rebuffed Sanofi's advances, Sanofi went directly to the shareholders, paid a premium for the shares, added in 澳洲幸运5官方开奖结果体彩网:contingent value rights, and ended up acquiring Genzyme.

The Bottom Line

A hostile takeover is where a party attempts to purchase a 澳洲幸运5官方开奖结果体彩网:controlling share of a com🌜pany's voting stocks or influences shareholders to vote out current management and replace them. Hostile takeovers happen because the acquiring party believes a company may be undervalued, or they want to access or own the company's brand, operations, technology, or industry foothold. It might also be a strategic move by 澳洲幸运5官方开奖结果体彩网:activist investors looking to effe♕ct change in a company's oper♎ations.