Definition
A hostile bid is a takeover proposal that the management or board of directors of the target company resists because they believe it is not in the company’s best interest. This type of bid is often unsolicited, meaning it was not requested or encouraged by the target’s management. Shareholders will decide if they want to accept the offer, potentially resulting in a change in company control.
Phonetic
The phonetic pronunciation of “Hostile Bid” is: /ˈhɒstaɪl bɪd/
Key Takeaways
- Definition: A Hostile Bid is a type of corporate takeover strategy, wherein acquiring company makes a direct bid to the shareholders of the target company, bypassing the board of directors or management. This bid is called ‘hostile’ because the management of the target company does not support the transaction.
- Impact: Hostile bids can result in significant changes within the target company. This includes potential restructuring, the ousting of management, or drastic changes in business operations. The long-term impact can sometimes be detrimental for both the target company and its employees.
- Defensive measures: Targeted companies often employ defensive measures to discourage or prevent hostile takeovers. Methods can include implementing ‘poison pill’ strategies, use of ‘white knights’ , or undertaking measures to make the company less attractive for acquisition such as asset sales or significant borrowing.
Importance
A hostile bid is a critical term in business and finance as it refers to a scenario where one company (the bidder) attempts to acquire another company (the target) without the target company’s board approval. It is a significant concept as it reflects the dynamics of mergers and acquisitions in a business environment filled with competition and strategic pursuits. Primarily, these bids can lead to major industry shake-ups and can substantially alter the balance of power in a particular sector. Understanding hostile bids also provides valuable insights into the potential risks and rewards of such strategies, such as the possibility for rapid growth, the risks of overpayment or potential legal and integration issues post-acquisition. Thus, the term “hostile bid” plays a considerable role in driving the decisions of stakeholders, particularly those in corporate strategic development planning, and investment decisions.
Explanation
A hostile bid is a tool used primarily in M&A (mergers and acquisitions) transactions, often serving as a strategic maneuver in corporate takeovers. Its main purpose is to acquire control of a target company whose management or board of directors might not be willing to agree to a merger or sale. By going directly to the company’s shareholders, the bidding company attempts to bypass the traditional negotiation process with management and directly purchase enough shares to seize control. In essence, the hostile bid is like an aggressive chess move in the world of financial markets and is typically used as a last resort when friendly negotiations fail or are unlikely to succeed. By launching a hostile bid, the bidding company forces the target company’s management to either improve company’s performance, employ defensive strategies, or potentially risk being taken over. Its substantial purpose, therefore, straddles both realms of corporate strategy and financing, providing leverage to shake-up entrenched management teams or gain control of underutilized assets.
Examples
1. Kraft’s Hostile Takeover of Cadbury: In January 2010, the American food conglomerate Kraft Foods launched a hostile takeover of Cadbury, the UK’s iconic confectionary company. Despite strong resistance from Cadbury’s management and employees, Kraft ultimately succeeded in its hostile bid, buying Cadbury for about £11.9 billion.2. Air Products’ Attempt to Takeover Airgas: In 2010, Air Products launched a hostile bid for fellow gas producer Airgas. Despite presenting an attractive premium on the latter’s stock, Airgas steadfastly refused to accept the bid, arguing that it significantly undervalued the company. In 2011, Air Products withdrew its bid after a Delaware judge upheld a poison pill defense by Airgas.3. Microsoft Bids for Yahoo: In 2008, Microsoft made a hostile bid to acquire Yahoo. Microsoft offered to buy Yahoo for about $44.6 billion in a half-cash, half-stock offer. Their bid was unsolicited and took the tech world by surprise. However, despite offering a 62% premium over Yahoo’s closing stock price at the time, Yahoo rejected the bid, saying it undervalued the company. Microsoft eventually rescinded its offer.
Frequently Asked Questions(FAQ)
What is a Hostile Bid?
A hostile bid is a type of takeover bid in which the acquirer offers to purchase the stock of the target company directly from the shareholders, without the consent or cooperation of the target company’s management.
What is the difference between a hostile bid and a friendly takeover?
The main difference is the level of cooperation from the target company’s management. In a friendly takeover, the management of both companies work together on the deal. In a hostile bid, the management of the target company is against the takeover.
How is a hostile bid carried out?
A hostile bid is typically carried out by directly offering to buy the shares from the shareholders, often at a price above market value. This is also known as a tender offer. Alternatively, the bidder may engage in a proxy fight, urging shareholders to vote out the management or board of directors in order to facilitate the takeover.
What happens after a hostile bid is launched?
The target company’s board of directors and management will typically review the offer and advise shareholders on whether to accept or reject it. They may also enact defense strategies to thwart the takeover, such as a poison pill, crown-jewel defense, or a white knight strategy.
Why would a company make a hostile bid?
A company might choose to make a hostile bid if they believe that the acquisition would be profitable or strategically advantageous, but the management of the target company is unwilling to agree to a merger or buyout.
Is a hostile bid legal?
Yes, a hostile bid is legal. However, it is subject to a variety of laws and regulations to protect shareholders and to ensure a fair market.
What risks are associated with a hostile bid?
Hostile bids carry several risks, including the risk of overpaying for the target company, the risk of a protracted and expensive takeover battle, and the risk of difficulties integrating the target company after the takeover due to resistance from the management or employees.
Related Finance Terms
- Takeover Defenses
- Mergers and Acquisitions
- Shareholder Rights Plan
- Tender Offer
- White Knight
Sources for More Information
