Hostile Takeover Bid

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Last Updated:October 25, 2023

What is a Hostile Takeover Bid?

An attempt to acquire a controlling stake in a publicly traded company without the support and help of the targeted firm's board of directors is a hostile takeover bid. Therefore, an organization interested in a publicly traded company should get the board of directors' consent.

If the board rejects their offer, a potential acquirer has three options:

Make a tender offer
Start a proxy battle
Purchase company stock on the open market

An open invitation to shareholders to sell their shares to the prospective acquirer at a price above the going market rate is known as a tender offer.

A proxy fight is an effort to win shareholder support for removing board members and the election of takeover supporters. Additionally, a potential buyer may purchase shares on the open market.

It is an attempt to acquire a business despite the board of directors. Only publicly traded companies can experience hostile takeovers.

Key Takeaways

When a company buys, sells, or combines its business ventures, it does so through an acquisition. Conglomerates are prevalent in the business landscape due to the concept.
An acquisition might only sometimes take place peacefully, in any case.
An aggressive offer to acquire a target company is a hostile takeover bid.
Even though the target company does not want to be acquired, the acquirer finds a way to do so through hostile takeovers.
An acquiring company can use one of three main hostile-takeover tactics: a tender offer, a proxy battle, or buying more shares to increase control.
A tender offer is an open invitation to shareholders to sell their shares to the potential acquirer at a price above the market price.
The goal of a proxy fight is to replace current board members opposed to the takeover with new board members who support it.
If the tender offer and proxy fight fall short, an acquirer's last resort is to buy most of the target company's stock. A significant number of shares must be purchased on the open market.

types of Takeovers

Acquisition attempts by businesses or institutional investors are common. However, in the specific case of a hostile takeover, the target firm's board of directors does not entirely support the offer.

The board might even take the necessary steps to prevent the hostile takeover from happening.

On the other hand, a friendly acquisition is approved by the target company's board of directors. There are usually numerous negotiations and goodwill between the parties before an amicable resolution is reached.

An unwanted acquisition, however, can quickly become unfriendly in a hostile takeover, particularly if the assailant has a history of being aggressive.

The Target Board does not recommend most takeover offers when first made public.

Compared to friendly takeover bids, or those that the Target Board recommends at the time of the announcement, the success rate for hostile takeover bids is significantly lower.

The Target Board's suggestion and the bidder's desire to raise its price to win that recommendation are the main factors determining whether an off-market buyout offer will succeed.

However, even with the Target Board's acceptance, a hostile bidder still runs a significant risk of failing to take control of its target.

The following describes the distinction between a hostile takeover and a friendly acquisition:

1. Friendly Acquisition

The management teams and board of directors approve the takeover offer. The two parties meet at the table to bargain amicably.

If both parties agree, the target's board informs its shareholders of the offer and the board's suggested course of action. In almost all cases, the target's shareholders would then concur.

2. Hostile Takeover

A hostile takeover attempt is typically made when a friendly negotiation fails and goodwill from the initial negotiation has deteriorated.

The targeted firm's management and board of directors had previously objected to the acquisition. Still, the buyer has chosen to go around the board and pursue the acquisition directly with the shareholders.

Understanding hostile takeover bid

A company will generally make a takeover bid if it wants to expand, eliminate a rival, or both. For example, the company may wish to grow technologically, attract more customers, access new distribution channels, or increase market share.

A bid could also come from an activist investor who sees an opportunity to improve the target firm's performance and make money from a rise in the stock price. Typically, the first step is to create a proposal to the board of directors to purchase an influencing interest in the company.

Hostile takeover bids are offers of acquisition made by one business or entity that is not desired by the target. The vast majority of acquisitions and mergers happen amicably.

Usually, the board members of the target, as well as acquiring companies, get together and agree on the specifics of the acquisition.

Let's say the decision is made that the offer is not in the shareholders' best interests. Of course, the board members have the right to reject it in that situation. However, occasionally, one or both parties may disagree with the proposed takeover bid.

This is the time for a hostile takeover offer. A hostile takeover bid is defined differently depending on the context. Any takeover offer not approved by the Target Board when it was first publicly disclosed may fall under this category.

This includes "unsolicited" takeover offers that surprise the Target Board but are subsequently recommended soon after the offer is first made public.

According to that definition, 46 hostile off-market takeover bids (of any value) were announced between January 2015 and December 2017 for Australian ASX listed Targets. 61% of all off-market takeover offers for Targets listed on the Australian ASX.

Therefore, upon the first announcement of the bid, the Target Board only recommended the majority of off-market takeover bids.

Hostile Takeover Strategies

Due to their reputation, hostile takeovers have likely accrued an unjustified terrible reputation. However, people might have a different opinion of the same transaction if it were referred to as a "Direct Shareholder Approach," which is just what a hostile takeover is.

Hostile takeovers may or may not add value, but one thing is for sure; they sharpen focus.

They typically target larger publicly traded companies and are started after a formal proposal has been turned down. Regarding hostile takeovers, there are a few well-known attack strategies.

Initially, the acquirer usually starts by delivering a letter of intent to purchase the company for more than market value, commonly referred to as a bear hug.

If the board declines the potential acquirer's offer, they have three options, starting with the tender offer.

1. Tender offer

The prospective buyer could make a tender offer to the company's shareholders. It is an offer to buy controlling stock in the target company for a predetermined price.

The fixed price frequently exceeds the valuation of the firm's shares and might buy and sell on the stock exchange by a significant margin. The higher price is a tactic to persuade the shareholders to agree to the stock sale.

Usually, the price is set higher than the share's current market value to encourage sellers to part with their claims. An overview of the acquirer's recommended specifications may be included in the formal tender bid.

For instance, the acquiring entity may specify a time frame for buying the stocks. Once the window closes, they might turn to alternative strategies to buy the business.

The Securities and Exchange Commission (SEC) must receive the acquisition documents the acquiring company submits. To help the target company decide, they must also explain their goals to the company.

Sanofi is an illustration of an acquirer who used the tender offer strategy. In 2010, Sanofi attempted to buy the biotech company Genzyme. They ultimately had to make a sizable offer for the company's shares to prevail.

Although it seems simple, a tender offer is one of the trickier takeover tactics. Therefore, most businesses take precautions to safeguard themselves from such an acquisition.

Businesses can implement takeover defense strategies to defend themselves against tender offers. In these circumstances, a proxy battle may be used.

Tender offers, which are frequently linked to hostile takeovers, involve the public

announcement (i.e., public solicitation) of an offer to acquire control of a company without the consent of the management group and board of directors.

2. Proxy Fight

A proxy fight, also referred to as a proxy battle, is another method for taking control of a company's operations. The goal of a proxy fight is to defeat incumbent board members opposed to the takeover by electing new directors who support it.

It entails removing board members who oppose the merger proposal and bringing in new board members. To do this, shareholders must be convinced that new leadership is required.

To prevail in a proxy battle, the acquiring entity must convince the existing stockholders that a shift in management is necessary.

If shareholders favor a management change, they may be persuaded to authorize the potential purchaser to vote their shareholdings by proxy in favor of a new directors member or members.

The acquiring company can accomplish this by identifying issues with the current leadership. Then, the shareholders may favor the idea, for example, if the company has underperforming assets or is experiencing financial trouble.

They will allow the acquiring entity to vote for their shares by proxy if they are persuaded.

The company may appoint new board members if the proxy battle is successful. The acquirer typically suggests members who will support the acquisition.

3. Purchasing shares

The final resort for an acquirer is to acquire a controlling stake in the target company's stock if the proxy battle and tender offers fail. In the open market, a sizable number of shares must be bought.

The acquiring entity will have a more excellent voice in decision-making the more shares it owns. If the buyer holds three-quarters of the company's shares, for example, they always have the most votes and, consequently, much control.

The prospective buyer may try to purchase enough stock in the company on the open market to obtain a controlling stake. However, purchasing large quantities of a company's stock inevitably drives its price steadily higher, which is far from simple.

The aggressor is likely to overpay because there is no connection between the price increase's cause and the business' performance.

Preventative measures

Preventive measures are defensive, and most concentrate on internal changes, such as increasing dilution and selling off the most valuable assets.

The three main kinds are listed below:

1. Golden Parachute Defense

The term "golden parachute" refers to situations in which key employees' salaries are increased to offer better benefits if they lose their jobs after a takeover.

Given the hostile nature of the takeover, it is unlikely that the acquirer would retain the current management and board. Still, in this case, they are compelled to uphold the severance agreements already in place.

This would include continuing insurance coverage and pension benefits that the executives had included to thwart the acquirer.

2. Dead Hand Defense

The traditional poison pill defense and the dead hand provision both aim to increase dilution to deter the acquirer, with similar results.

The additional shares are issued to the entire shareholder base, except for the acquirer, rather than allowing shareholders to buy new shares at a discounted price.

3. Crown Jewel Defense

The crown jewels refer to a company's most valuable assets, including patents, intellectual property (IP), trade secrets, etc.

This defense strategy is based on an agreement in which the company's crown jewels can be sold if the company were to be taken over. In effect, the target becomes less valuable after a hostile takeover.

Active defense measures

On the other hand, active defense strategies occur when the target or another third party violently rebuffs the takeover attempt. These are listed below.

1. White Knight Defense

The friendly acquirer stopping the hostile takeover by buying the target is known as the "white knight defense." The hostile bidder, also known as the black knight, only engages in this tactic when the target is just about to be acquired.

The target's management and board have often acknowledged that they will suffer significant losses, such as independence or majority ownership. However, the outcome is still in their favor.

2. White Squire Defense

An outside acquirer intervening to buy a stake in the target to thwart the takeover is known as a white squire defense.

The difference is that since only a partial stake was purchased, just enough to ward off the hostile acquirer, the target can hold onto majority control.

3. Acquisition Strategy Defense

To become less desirable, the target company may also try to acquire another business. Given that the acquisition is likely to be strategically pointless and that a sizable premium may need to be paid, the post-deal balance sheet shows less cash (and use of debt).

4. Pac-Man Defense

When the target tries to acquire the adversarial acquirer, the Pac-Man defense takes place (i.e., flip the script). Instead of attempting to acquire the rival company, the retaliation M&A is designed to thwart the hostile takeover. The Pac-Mac defense is a last resort because completing the acquisition could have unfavorable effects.

5. Greenmail Defense

This is known as greenmail when an acquirer acquires a sizable voting stake in the target business and threatens a hostile takeover unless the target repurchases its shares at a sizable premium.

By repurchasing its shares at a premium in a greenmail defense, the target will be pressured to thwart the takeover. Today, however, anti-greenmail laws have essentially made this tactic obsolete.

6. Staggered Board Defense

Each board member is divided into distinct classes according to their term length if the target company's board is strategically organized to be a staggered board.

Due to the interests of the current board members and management being protected, a staggered board defends against hostile takeover attempts. The staggered board makes it difficult and time-consuming to add additional board seats, which may put off potential buyers.

Three Common Mistakes in Hostile Takeover Defense

It is crucial to comprehend how to defend against hostile takeover offers in this new economic environment. However, it would be a severe error to treat defending against a hostile takeover bid and defending against a shareholder activist campaign similarly.

Takeover defenses, also referred to as antitakeover provisions, are the result of decades of research into how offensive and defensive strategies interact in the market for corporate rate control.

Recent research demonstrates that defenses have costs and benefits that differ across businesses and throughout a firm's existence.

A takeover defense is any action taken by a company to make it more expensive or less advantageous for an outsider to take over the company's board and upper executives.

This definition covers steps businesses take to thwart or reject unsolicited takeover offers, including dead-stop agreements, share repurchases, asset sales, and Pacman defenses, where the target company buys shares of the company making the offer.

There are three mistakes that targets frequently make, the first being a failure to deploy takeover defenses.

1. Failure to Deploy Takeover Defenses

Many are reluctant to use legal arguments to block hostile takeover offers. As a result, corporate defenses have become less popular over the past 20 years.

Many public company directors have come under direct or indirect fire for using legal strategies like defensive bylaw amendments, poison pills, and other legal safeguards.

However, defensive action in responding to an unsolicited takeover offer is more than acceptable. Timing is frequently at least one unfair advantage for hostile bidders.

When a target's stock price is low or a business is experiencing a crisis, they frequently approach its prey opportunistically. A target company needs more time than anything else to combat this.

If that is the case, management and the board need time to respond and show that the company's intrinsic value is substantially more significant than the bidder's offer price.

A target must consider adopting a poison pill to prevent the accumulation of a sizable position and ensure that any tender offer cannot close without the board's approval.

Furthermore, a board should consider postponing upcoming director elections because the next move of a hostile bidder is typically to start a proxy fight to remove the current directors.

It is possible to achieve this by delaying the annual shareholder meeting or limiting the shareholders' ability to call special arrangements or act by written consent.

To be straightforward, this should be carefully considered with legal counsel's advice because, in the event of a potential takeover offer, some of these actions may be legal while others may not.

2. Overemphasis on Corporate Governance

Corporate governance issues are frequently at the forefront of activist campaigns.

ISS and Glass Lewis strongly emphasize a company's corporate governance practices when recommending a vote in any proxy contest, even though an activist's economic case always takes precedence.

The same is true for many institutional investors focusing on governance, especially passive investors (e.g., index funds).

This focus is understandable to some extent because the issue of which directors are best positioned to create value is at the center of every proxy contest. In that sense, hostile takeovers are distinct.

When shareholders are asked whether an offer at a particular price is sufficient to surrender their shares, choosing to change executive compensation practices, refresh the board composition, or increase shareholder rights becomes significantly less important.

The significant change in the investor base that commonly follows a buyout offer is amplified by the entry of risk intermediaries and other hedge funds.

Ultimately, the critical question is which team—the target's current board and management team or the hostile bidder's offer—can deliver more near-term value to the shareholders. It is all about the money; nothing else matters.

3. Hesitance to Develop Credible Alternatives

A target board must be resourceful when facing a hostile takeover. While claiming that management's standalone plan will increase shareholder value may be true, it is frequently challenging to support unless a company has direct evidence to support the claim.

The credibility of the current board and management team becomes the focus of the "trust us" defense, with uncertain results.

With that in mind, it is typically crucial for a board to create good alternatives to the hostile bidder's offer. This entails carefully examining the available strategic options with the help of financial and other advisors.

This does not necessarily imply that such a review process should be made public (competitors might use this to hire key employees and take market share). However, a board must be aware of all other viable options to increase shareholder value significantly.

These options could include selling or spinning off divisions, buying other businesses or assets, bringing in new strategic or financial investors, returning capital to shareholders, or formally marketing the company for sale.

Unnecessarily weakening a company's position in a takeover defense conflict results from a board's failure to consider these options. Additionally, it puts the council at risk of claims that it failed to exercise due diligence when considering an unsolicited takeover offer.

How successful are hostile takeovers?

The possibility that the bidder will succeed in gaining control of the Target firm, that is, gaining ownership of 50.1% or more of the Target firm's shares, is what makes those hostile off-market takeover bids interesting.

Only 17 of the 46 hostile off-market takeover bids for Target companies with Australian ASX listings announced between January 2015 and December 201 successfully gave the bidder control of the Target company.

Only 37% of hostile off-market takeover bids were successful during that time.

Compared to the 29 friendly off-market takeover bids for Target companies with Australian ASX listings announced between January 2015 and December 2017, hostile bids have a relatively low success rate.

Twenty-four of those friendly bids, or 83%, resulted in the bidder taking control of the target.

The likelihood that a hostile off-market takeover bid will be successful depends on three main factors:

1. Target Board Recommendation

A recent study shows that even if the Target Board initially advises against the bid, the most crucial factor is whether the Target Board ultimately recommends the hostile offer at some point after it is first made public.

Within January 2015 and December 2017, there were 17 successful hostile off-market takeover bids; of those, the Target Board recommended acceptance in 15 (or 88%) cases.

The Target Board recommended acceptance in another hostile off-market takeover bid where the bidder succeeded in gaining control, but only after the bidder had reached 65% acceptance.

Interestingly, neither bidder acquired 100% ownership of Target in either of the two hostile off-market takeover offers that were not recommended. The bidder could not rely on compulsory acquisition to reach 100% because both bids stalled below 90%.

This means that a hostile bidder has never succeeded at a 100% level in the previous three years without receiving a favorable Target Board recommendation.

2. Price Increases

The bidder's willingness to raise its initial bid price to win the Target Board's support is the other crucial factor in cost.

The Target Board only recommended accepting the bid in 11 instances where the bidder increased the offer price.

Only four of the bids received a favorable evaluation without a price increase.

3. Significant risk of failure.

Hostile bidders should highly value the Target Board's advice and be willing to raise their offer price to obtain it. That tactic by itself, though, fails to ensure success.

Eight of the 25 (32%) hostile off-market takeover bids that failed between January 2015 and December 2017 were approved by the Target Board at some point. In two of those eight instances, the bidder raised the price that was being offered.

Therefore, there is a real possibility that a hostile bidder will fail to gain control of its Target even if the Target Board recommends the bidder.

The Impact of Significant Shareholders

Significant shareholders' acceptance is another factor in determining whether hostile off-market takeover bids are successful.

Since many Targets do not necessarily have one or more major shareholders on their register, this factor is less significant.

However, it was evident that a shareholder with 10% or more of the target shares can significantly affect a bidder's chances of success in achieving its goal of 50.1%.

Even in cases where the Target Board advises against acceptance, the bidder may still be successful if significant shareholders accept the hostile takeover offer.

It becomes very challenging for the Target Board to uphold a reject recommendation when shareholders holding a significant portion of Target's shares accept a hostile bid.

In Downer EDI's hostile off-market acquisition bid for Spotless, where the Spotless Board upheld its reject recommendation until it had received acceptances of over 65%, we saw this happen.

In contrast, the bidder faces a significant obstacle to success if the major shareholders reject the hostile takeover offer. This was demonstrated in CIMIC Group's hostile off-market acquisition bid for Macmahon Holdings Limited.

A significant shareholder's refusal to accept the offer in that bid was a major factor in CIMIC's failure to gain control. At that point, CIMIC had a 20.54% pre-bid stake in Macmahon, and its bid quickly rose to 23%.

One significant shareholder in Macmahon held a 5.9% stake; had that stake been included in CIMIC's offer, the company would likely have gained considerable momentum and possibly quickly approached the 40% mark.

However, the owner of that 5.9% stake sold the entire stake to shareholders who opposed CIMIC's bid in an off-market transaction. As a result, CIMIC's proposal stalled by 23% without including that stake in its offer.

Whether the bid remains conditional, including being subject to any minimum acceptance condition (typically 90% or 50%), is crucial in getting acceptances from significant shareholders.

Institutional investors frequently will not accept a bid. But, at the same time, it is still conditional. Hence, bidders typically need to decide strategically to waive the conditions at some point during the offer period to receive acceptance.

Despite having paid a control premium, waiving conditions exposes the bidder to complete the offer without obtaining control of Target.

How to Be Prepared for a Hostile Takeover Bid?

The most frequent error is a lack of preparation, which happens long before the barbarian arrives at the gate.

A business should follow these crucial steps to get ready:

1. Have an Emergency Communications Response Plan

Many bidders start by speaking to their targets informally and privately.

This illustrates how friendly deals are typically less expensive than hostile ones and how public hostility tends to decrease the worth of the targeted company by creating uncertainty among critical stakeholders, including clients, customers, and employees.

However, given the current state of the stock market, many bidders are either skipping the private stage altogether or are going public immediately.

It is essential to have a structured internal process in place if a hostile bidder decides to go public to prevent errors in such a hectic setting. The most crucial thing is for the public to respond quickly and effectively, ideally during the same news cycle.

To respond to inquiries from investors, the media, employees, and other stakeholders, a company should develop a break-the-glass communications response plan that includes draft press releases, media statements, talking points, and Q&A.

2. Review the Charter and Bylaws

Numerous businesses have out-of-date organizational documents that seasoned and experienced lawyers have never examined.

Having a knowledgeable defense counsel review a company's organizational documents is crucial to identify legal weaknesses from the defense's point of view.

The fine print, which includes information about when shareholder meetings will take place, how those meetings will be run, how votes will be counted, and how elections will be scrutinized, is frequently seriously inadequate.

The best time to make these changes to the bylaws is during peacetime, the period before a hostile bidder or activist approaches the company.

3. Draft a "Shelf" Poison Pill

Every listed corporation should have a current, complete, and bargained poison pill to allow the board to respond quickly in a hostile takeover bid.

If, for example, a hostile bidder files a Schedule 13D with a "toe hold" stake of 10% to 15% of the shares and keeps buying stock, there is not enough time to create a shareholder rights plan from scratch.

Suppose a firm takes a few days to implement a poison pill. In that case, the bidder may purchase a 20 percent or 25 percent position during the transition period. The late adoption of a poison pill can lead to losing control over a company.

4. Monitor the Stock

It is crucial to hire a knowledgeable watch company to keep track of trading in the company's stock so that firms can be informed in advance if a hostile bidder decides to take a "toe hold" position.

As a result, the board is then able to quickly adopt defensive measures, such as the adoption of a poison pill.

5. Engage the Shareholders

Typically, shareholders, not judges or the media, decide takeover disputes. Therefore, it is essential to have a robust shareholder engagement program to increase trust in and understanding of the company's strategic plan during the proxy season and the off-season.

6. Conduct a Financial Self-Evaluation

A board should always be well-versed in its available strategic options. As a result, a board should regularly assess the company's strategy, business plan, capital allocation, performance, and other potential strategic alternatives.

The board should do this with the help of a financial advisor and other consultants.

7. Retain a Response Team

The company is making bets on its current situation, which jeopardizes its ability to withstand hostile takeover offers.

As a result, businesses should put together a response team before a possible attack.

Furthermore, there is not enough time for "training on the job." Therefore, employing experts who have a wealth of knowledge in protecting businesses from an aggressive attack is crucial. After all, nobody would request a heart bypass from a general practitioner, either.

Hostile Takeover Bid example

Tesla's co-founder and CEO, Elon Musk, unexpectedly offered to take Twitter private after it was revealed that he was the largest shareholder and had been offered a board seat. Musk claimed that he could unlock the extraordinary potential of the communication platform.

Musk's friendly takeover failed, and the hostile takeover soon started after Musk announced his plans.

Shortly after Musk announced his plans, Twitter quickly tried to thwart the attempt using the poison pill defense to dilute Musk's 9% stake and make the purchase more expensive.

On April 25, 2022, Twitter announced that it had agreed to sign a legally binding agreement to be acquired by a company owned entirely by Elon Musk.

Following the transaction's completion, Twitter would cease being publicly traded. In addition, the proposed agreement would provide that shareholders receive $54.20 as a dividend.

The buyout is estimated to be worth between $43 and $44 billion, representing a significant premium over the "unaffected" share price before the takeover rumors.

According to the board, the poison pill would go into effect when a company like Elon Musk acquired 15% or more of Twitter's common shares.

However, the negotiation was significantly altered when Musk was able to secure financing commitments to support his offer and the possibility of a tender offer when the board's fiduciary duty (i.e., acting in the best interests of shareholders) was coming under more scrutiny.