Friendly Takeovers vs Hostile Takeovers

The former requires management and shareholder agreement, while the latter merely requires the shareholders' agreement

Josh Pupkin

Reviewed by

Josh Pupkin

Expertise: Private Equity | Investment Banking


November 28, 2023

What Are Friendly Takeovers And Hostile Takeovers?

A friendly takeover requires management and shareholder agreement, while a hostile takeover merely requires the shareholders' agreement.

Tens of thousands of acquisitions occur annually. As a result, this business expansion tool acts as a powerful method for development while simultaneously reducing competition.

An acquisition generally involves a large firm and a small firm. One of the two, usually the more significant, feels that the other company's assets, market position, intellectual property, employees, etc., would create value for their organization. 

Companies producing an input or output related to another company's product or competitors are prime candidates for takeovers. These are called vertical and horizontal takeovers,  respectively.

A company has two paths to acquiring or "taking over" the other company: friendly and hostile.

As previously mentioned, these two acquisition paths differ in how communication and the offer are made between management teams and shareholders. To fully understand their differences and commonalities, we will first cover what each type of takeover entails.

Then, to apply this knowledge, real-life examples will be laid out. First, we will see how a takeover occurs when all participants are willing, a friendly takeover.

Key Takeaways

  • Friendly takeovers involve strategic negotiations with the target's board, while hostile takeovers use aggressive tactics, often bypassing the board.
  • Friendly offers include cash, stock, or a mix with premiums for approval. Hostile tactics, like "bear hugs," may engage shareholders directly, potentially leading to contested proxy votes.
  • Both takeover types result in organizational integration, with changes like layoffs or asset sales, as the acquirer aims to strengthen its position.
  • Elon Musk's Twitter bid illustrates a hostile takeover with share acquisition and privatization attempts. Meta's friendly takeover of WhatsApp showcases successful negotiation and mutual benefit.
  •  Friendly takeovers prioritize mutual consent and strategic alignment, whereas hostile takeovers may stem from dissatisfaction with management or previous declined offers.

What is a friendly takeover?

To begin this takeover, the management of the acquiring company will extend a formal offer to the board of directors of the company they want to acquire.

This offer sets in motion a series of events, all to ensure that the directors' fiduciary duties are followed. These duties state that a director must act in the best interest of a company's shareholders.

Whether or not an acquisition is in the best interest of shareholders is usually the main concern for a board of directors when considering an offer to purchase their company.

This type of acquisition is generally done when a final deal is expected to be negotiable between the acquiring and target companies. It is also done to maintain strong relationships with the board of directors, which can be crucial to shareholders.

An offer will usually consist of either:

  1. Cash amount 
  2. Shares of the purchasing company. 
  3. Some combination of both

The offer will usually overvalue the company, creating a premium that encourages directors and shareholders to accept the deal. This kind of proposal to purchase a company is called a tender offer.

After the offer is made, the board of directors and the company extending the offer negotiate. This procedure continues until the board accepts and notifies shareholders of the greenlit offer. Usually, the offering company will attempt to appeal to the largest shareholders as they hold the most significant voting power.

The deal will be executed if most shareholders vote in favor of the takeover. Usually, a simple majority of 50% is required. However, the percentage could be more significant depending on the company, with some requiring supermajorities of 70% or more.

A regulatory body must approve if shareholders vote in favor of the takeover. Usually, these deals need approval from the Securities Exchange Commission (SEC), the Department of Justice (DOJ), or the Federal Trade Commission (FTC).

Should a deal fall within all legal requirements, the takeover will occur. The acquired company will now be under the control of the new parent company.

What is a hostile takeover?

This form of acquisition, as the name implies, is more aggressive. It occurs when a company is acquired without a willing board of directors. If the acquiring company deems a hostile takeover the best course of action, there are two options to pursue:

Bear Hug: An offer is made to the board with a short deadline.

Hostile Tender Offer: Generally, an offer is extended to shareholders directly at a premium. This method aims to ignore the board entirely.

The first option invokes the directors' fiduciary duty, resulting in a sale should the board have no viable reason to decline the offer.

The second option can end up causing a proxy fight. This involves the holders of voting shares banding together to vote in favor of the acquisition, against the will of the board of directors.

A company might pursue a hostile takeover for several reasons. For example, suppose a separate formal offer has already been declined. In that case, a hostile takeover might occur to ignore the board that previously fell. Another reason could be that shareholders are unsatisfied with the current management.

Whichever method or reasoning is involved in a hostile takeover, the result is the same: the wishes of the target company's board are ignored as much as possible. Should the offer be accepted, the same regulatory bodies in a friendly takeover must approve (SEC, DOJ, and FTC). 

Comparing Friendly and Hostile Takeovers

We now have a baseline understanding of how each form of takeover can occur. First is the friendly takeover, including both board members to shareholders. Second, the much more anarchical hostile takeover, ignoring the board entirely and going directly to shareholders.

Now we can move on to an analysis of their differences and what makes them so similar. While each type of takeover has its unique characteristics, they both still are, at their base, takeovers.

First, we will look at the similarities. In both cases, one company, generally the larger of the two, is trying to take over another company. The word "acquisition" can be used interchangeably with "takeover" for our purposes.

The target company is then paid for in cash, stock, or a combination of both and the newly purchased company begins to meld into the purchaser. The acquired company will be merged into the purchasing company, with the possibility of any quantity of employees being laid off or assets sold.

Now, we can cover the differences. The most significant difference occurs in the earliest phases of the takeover.

In the case of a friendly takeover, the board of directors is notified and negotiated with before a vote is held for shareholders. In a hostile takeover, the board of directors is either ignored or sent an aggressive offer with an unreasonable deadline.

As you can see, this underlines the point: whether the board of directors is willing to sell their company decides if a takeover is either of the takeovers.

Present-day examples

We now firmly comprehend each type of takeover and why a company aiming to acquire another would pursue each type. With this knowledge in hand, we can look at examples of each in recent history and why they have occurred.

As you will notice, both are examples of tech companies. In recent years, there have been many tech takeovers.

Tech startups provide companies with innovative new goods and services. Acquiring these companies helps avoid the expensive research and development process. Some of these companies offer large user bases as well.

Often, these acquired companies require capital to explode in growth. We will first look at the wealthiest man in the world and his attempt to bring free speech to one of the largest social media platforms in the world.

After that, we will see how Meta performed a friendly takeover of WhatsApp. This furthered Meta's offerings and created a powerful partnership. Ultimately, the acquisition has resulted in an app's active user base of 2 billion, over a quarter of the earth's population.

Elon Musk’s hostile takeover of Twitter

Elon Musk's attempted acquisition of Twitter has been one of the most notable hostile takeover events in history. Twitter is a social media platform focused on short posts under 280 characters. Currently, the venue boasts almost 300 million users.

Musk began complaining about the free speech issues he believes to exist on the platform. This started the chain of events that would result in Musk's bid. Seemingly aiming to change the free speech issues, he began purchasing Twitter stock on the 31st of January 2022.

Slowly, Elon acquired more and more shares of the social media company. Finally, on the 4th of April 2022, Musk announced that he had taken ownership of 9.2% of Twitter, totaling $2.64 billion.

The following day, Musk was invited to join the company's board. Elon tentatively accepted the offer but ultimately declined it four days later. Confusing many, it turned out that he likely declined it because the agreement for a position on the board would limit Musk's ownership of Twitter to 14.9%.

This realization was made on the 14th of April when Musk offered to purchase the company. Offering $43 billion or $54.20 per share, Musk aimed to privatize Twitter.

Since the offer was made public with a deadline quickly arriving, this offer would be closer to a hostile takeover attempt than a friendly one. At the time of the offer, one Twitter share cost $45.08, meaning that Musk offered a premium of over 20%.

Considering these factors, Musk's offer would be categorized as a bear hug offer. Moreover, this bid is made to the board of directors, exploiting their duty to shareholders when considering offers.

The offer, however, at least for now, is on "hold ."Posting a tweet on the platform, Musk voiced his fears of bots and what percentage of Twitter users they make up.

He believes Twitter's reports of bots making up only 5% of the user is an underestimation of the scope of the issue. The most significant issue with the "hold" that has been put on the deal is that there is no "hold" clause within the contract.

This puts Musk in a precarious position with a $1 billion fee if the deal does not go through. What will happen with the acquisition is still unclear, forcing the general public to wait and see. 

Meta’s friendly takeover of WhatsApp

One of the best recent examples of a friendly takeover is Meta's acquisition of WhatsApp. WhatsApp is a free encrypted messaging app serving 2 billion people globally.  Meta, the parent company of, most notably, Facebook and Instagram, purchased the company in 2014.

The initial bid, done through friendly means and sent to the company's board of directors, valued the company at $16 billion. This made the bid a friendly takeover attempt by Meta.

After some negotiation, a final deal was made, with Meta agreeing to pay $19.6 billion. The extra $3.6 billion compensated WhatsApp employees for staying at Facebook.

Facebook's share value climbed after news of the deal came out, indirectly adding an extra $1.7 billion to the agreement for WhatsApp. Starting at an impressive 500 million users when the acquisition occurred, the app has now grown to 2 billion. This acquisition is a prime example of a friendly takeover.

By ensuring the involvement of both the board of directors and shareholders and reaching a mutually acceptable conclusion through negotiation, the companies melded well. This ultimately allowed both Meta and WhatsApp to flourish from the acquisition.

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Researched and authored by James Fazeli-Sinaki | LinkedIn

Edited by Aditya Murarka | LinkedIn

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