Friendly Takeovers vs Hostile Takeovers

What are Friendly Takeovers vs Hostile Takeovers?

The word “takeover” refers to the acquisition of a company by another company, whether that be a larger competitor or a private equity firm. Companies often acquire other companies for several reasons, mainly for cost and revenue synergies, as well as to eliminate competition.

The “friendly” or “hostile” part refers to whether the company on the buy-side has the approval of the board of directors of the target company. Friendly takeovers are undoubtedly more common because when the company on the sell-side doesn’t want to be bought, it typically just does not occur.

Hostile takeovers occur when the target company’s management opposes the acquisition, often due to strategic disagreements, valuation concerns, or differing visions for the company.

In hostile takeovers, despite the buyer’s bid being rejected, the buyer will persist in trying to purchase the target company directly from the shareholders. In this case, the buyer will make a “tender offer” to the shareholders, which is the price per share that shareholders will be paid.

Key Takeaways

Friendly and hostile takeovers are classified based on whether the target company's management supports or opposes the acquisition, and both are part of the mergers and acquisitions (M&A) domain.
Friendly takeovers occur when the target company’s management is open to being acquired, are significantly more prevalent in the M&A space, and are often (but not always) less expensive than hostile takeovers.
Hostile takeovers occur when a company’s management is not open to being acquired, and the buyer goes directly to shareholders, often paying a significant premium to convince shareholders to sell their shares.
Hostile takeovers are often a longer, more tedious, and overall more expensive process than a friendly takeover due to legal fees, higher offer prices, and simply a longer, significantly more complex process.

Advantages of Friendly Takeovers

Friendly takeovers have several advantages over hostile takeovers, mainly because of the general cooperation between the buyer and the seller and the price.

Let’s understand a few advantages below:

During a hostile takeover, the acquisition may disrupt the business of the target company, and when the target company and the buyer work together collaboratively, it often makes the company (post-merger) run smoother in a cooperative environment.
Both parties may also have to pay high legal fees during the hostile takeover, in addition to the possible expenditures of the target company's defensive measures if a bid is rejected.
Generally, friendly takeovers are more appreciated by the executives of the target company, mostly because in a hostile takeover, there is no agreement on a price, where a hostile takeover really does represent the word “takeover”.

Disadvantages of Friendly Takeovers

Despite the fact that friendly takeovers may seem like a better overall situation, friendly takeovers do have some downsides in comparison to a hostile takeover, such as:

Golden parachutes are oftentimes a major dissuading factor during friendly takeovers. They essentially force the buyer to pay significant financial compensation to top management if they are fired post-acquisition, possibly dissuading buyers if they intend to replace management.
Furthermore, during friendly takeovers, the buyer must pay what is known as a control premium in order to acquire the target company, which is essentially an additional price the buyer must pay when purchasing majority ownership of the company.
Friendly takeovers are also not guaranteed to close even if the target company and the buyer are in agreement. In most cases, for a public company to be acquired, it often requires shareholder approval and will fall through if the shareholders believe the price is too low.

Advantages of Hostile Takeovers

During a hostile takeover, the management of the target company rejects the offered bid by the buyer, but the buyer attempts to bypass management and acquire the company by appealing directly to shareholders.

Despite the aggressive nature of the acquisition, hostile takeovers have their own fair share of advantages:

In many cases, a hostile takeover is the only way for a buyer to acquire a company that is appealing to them. Additionally, it allows the buyer to appeal directly to the shareholders, who may be easy to convince if they are unhappy with the management of the target company.
Oftentimes, even the threat of a hostile takeover can persuade target companies to become more cooperative. However, this can sometimes have the opposite effect, and the target company will become extremely defensive when a hostile takeover is threatened.
Furthermore, a hostile takeover can be quite advantageous for shareholders because the buyer will often offer shareholders the opportunity to tender (sell) their shares at an extremely inflated price, oftentimes 20-30% greater than the current market price.

Disadvantages of Hostile Takeovers

Even though hostile takeovers have many pros, many buyers steer clear of hostile takeovers not only because of the defensive maneuvers and tactics that target companies can utilize, but also because of the significant premium buyers must pay for a hostile takeover.

Let’s understand a few disadvantages below:

When the buyer desires to purchase a company through a hostile takeover, and the company's management is unwilling to sell, the buyer must convince the shareholders to tender (sell) their shares at a significant premium to convince the shareholders to sell
Additionally, not only does the buyer have to pay a significant premium to acquire the shares, but also for potential legal fees linked to hostile takeovers. These legal fees often make it difficult for the buyer to justify the acquisition financially.
Furthermore, using defensive strategies by target companies can frequently lead to conflict between the buyer and the seller. This tension can strain relations and lead to employee disengagement or turnover due to uncertainty about future leadership or job security.
When the target company's employees hear about the impending hostile takeover, many senior executives and managers may quit, in addition to junior-level employees, for fear of a change in company culture or just layoffs.
When employees of the target company take those measures, there is the possibility that it will decrease the value of the acquisition and the target company in general, therefore making the original acquisition by the buyer not worth it.
Moreover, there is the possibility that when a company acquires another in a hostile takeover, it can result in bad publicity for the company, therefore negatively affecting their business and their ability to land deals in the future, while simultaneously spoiling their reputation.

Hostile Takeover Defenses

Let’s understand a few defensive strategies target companies make during hostile takeovers:

Hostile Takeover Defenses
Defensive Strategy	Description
Poison Pill	The target company issues discounted shares to current shareholders, diluting ownership and making the acquisition more expensive
Staggered Board	This is when only a few executive board members are elected yearly, making it harder to replace the board in a proxy fight.
Golden Parachute	When top executives at a company are given substantial severance packages if fired after the acquisition
Greenmail	When the target company buys back their shares from the acquirer at a premium, giving the buyer some profit and incentivizing them to leave the acquisition.
Standstill Agreement	The target company pays the bidder to stop buying more shares for a given period, buying them time to strategize.
White Knight	When the target company finds a more friendly buyer to acquire them, making sure leadership is still in place.
Pac-Man Defense	When the target company flips, the script starts buying shares of the acquirer’s company, disrupting the plan.
Crown Jewel Defense	When the target company starts selling off valuable assets owned by the company, making them less attractive to the acquirer, hoping the acquirer backs off.
Litigation Defense	The company sues the acquirer for securities violation or other legal claims, aiming to cripple the acquirer with legal costs, hoping they will back off.

Examples of Hostile And Friendly Takeovers

Although friendly takeovers are far more prevalent than hostile takeovers, hostile takeovers still do occur.

The following case studies explain both sides of the said hostile takeover.

Kraft Foods’ Hostile Takeover of Cadbury (2010)

In 2010, Kraft (a food company based in the U.S.) made a bid for Cadbury, a chocolate company based in the U.K. At first, Cadbury’s management team kept rejecting offers for a few months and resisted the acquisition.

While Cadbury enacted several defensive strategies to prevent a hostile takeover from Kraft, the shareholders of Kraft accepted about a $20 billion valuation, and Cadbury reluctantly accepted the outcome.

Oracle’s Hostile Takeover of PeopleSoft (2005)

Oracle (a computer technology company) attempted a friendly takeover of PeopleSoft (a software company), but its board rejected the initial bid. After that, Oracle proceeded to offer multiple times, all of which were rejected by PeopleSoft’s board.

Oracle then started to take measures to begin a hostile takeover, while PeopleSoft began some defensive measures, which included a poison pill strategy, but that still did not deter Oracle from acquiring the company.

Oracle then offered to buy PeopleSoft for a little over $10 billion, almost double their initial offer, which was accepted by shareholders, and Oracle then acquired PeopleSoft. This example goes to show how expensive a hostile takeover can be.

Conclusion

Friendly and hostile takeovers are simply different ways of doing the same objective, where that objective is acquiring another company, either to eliminate competition or just for revenue and cost synergies.

Hostile takeovers represent an extremely aggressive strategy to acquire a company by any means possible, and usually only happen when the buyer will have a great deal of financial benefit through the acquisition, despite the inflated price of the transaction.

On the other hand, friendly takeovers represent quite a cooperative transaction where both the target company and the buyer collaborate to land the best possible deal for both parties.

In conclusion, hostile and friendly takeovers are integral to the current M&A landscape, and a well-thought-out plan to acquire another company (hostile or friendly) can end in extreme financial growth for both parties.

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