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Hostile Takeover Bid

Definition

A hostile takeover bid is a strategy used in corporate finance where one company attempts to acquire another company without the consent of the target company’s board of directors. The acquiring company usually buys shares from other shareholders and bypasses the board of directors entirely. This represents an aggressive and often controversial form of attempted business acquisition.

Phonetic

The phonetic pronunciation of “Hostile Takeover Bid” would be: “hɒs-tail teɪk-oʊvər bɪd”.

Key Takeaways

Hostile takeover bids are an essential part of corporate actions that often occur in the business world. They represent a situation where a company or corporation attempts to take over another without the board’s agreement of the target company. Here are three key takeaways about hostile takeover bids:

  1. Going Against the Board’s Wishes: In a hostile takeover bid, the acquiring company makes the offer directly to the shareholders of the target company, typically when the board of directors does not agree to the acquisition. This is a significant deviation from the norm, as most takeovers are generally amicable and approved by the boards of both involved companies.
  2. Shareholder Profit: Hostile takeovers can sometimes be beneficial to the shareholders of the target company. Since the acquiring company is desperately trying to acquire ownership, they might offer a premium on the current share price of the target company to entice shareholders to sell. Thus, in some cases, shareholders gain monetary advantage.
  3. Defensive Measures: Companies under the threat of a hostile takeover often implement various strategies to avoid being acquired. These can range from implementing a poison pill strategy which makes the company’s stock less attractive to the potential buyer, to seeking a white knight — another friendlier company willing to acquire them in order to avoid the hostile takeover.

These points highlight the hostility, potential shareholder profit, and defensive measures associated with hostile takeovers in the corporate world.

Importance

A Hostile Takeover Bid is significant in the sphere of business and finance as it represents a strategy in which a company or investor aims to acquire another company without the consent of its board of directors. This can often involve purchasing shares on the open market or persuading shareholders to vote against current leadership. Despite its adversarial nature, it can be a catalyst for change and can stimulate innovation and efficiency by challenging complacency within the target company. From an investor’s perspective, it could also potentially lead to significant financial gain. Thus, understanding a hostile takeover bid is essential for companies to ensure preparedness and for investors to identify lucrative opportunities.

Explanation

A hostile takeover bid serves a specific purpose within the business and finance world, typically used as a strategy by an acquiring company to gain control of another company against the wishes of the target company’s management and board. The bidder initiarily pursues an unfriendly or adversarial approach with an aim to buy a controlling interest in the shares of the target company. This tactic is most commonly used when the target company’s board refuses to agree to a friendly merger or acquisition proposal or when they believe the target is significantly undervalued or has substantial potential for future growth and profitability.In terms of its application, a hostile takeover bid often acts as a catalyst for change. It can force companies to evaluate their performance, streamline operations, or reevaluate strategies – essentially acting as a mechanism for survival to prevent being overtaken. Moreover, these hostile bids serve as a method for the acquiring company to rapidly enter new markets, increase their competitive edge, acquire new technologies or simply to eliminate competition. However, such a move is not without risks and may result in a bidding war or substantial cost outlays, hence it requires careful strategic planning and execution.

Examples

1. Comcast Corp.’s Takeover Bid for The Walt Disney Company (2004): Comcast Corporation, the largest cable TV company in the United States, made an unsolicited $54 billion bid for The Walt Disney Company. The bid was a stock-for-stock transaction and was rejected by Disney’s management and board of directors, which considered that such a move was not in the best interest of Disney’s shareholders.2. British American Tobacco’s (BAT) Takeover of Reynolds American (2017): British American Tobacco launched a $47 billion hostile takeover bid for Reynolds American to create the largest listed tobacco company in the world. BAT already owned 42% of Reynolds and sought to acquire the remaining 58%. In the end, the takeover bid was successful.3. Air Products’ Hostile Bid for Airgas (2010-2011): Air Products, an industrial gas and chemicals company, launched a hostile takeover attempt of their competitor, Airgas in 2010. Initially, it offered a per-share price of $60 which was rejected by Airgas, calling the bid “opportunistic”. Air Products then increased its offer three times but Airgas rejected each one. In early 2011, Air Products withdrew its bid, thus ending one of the most high-profile hostile takeover attempts in recent years.

Frequently Asked Questions(FAQ)

What is a Hostile Takeover Bid?

A hostile takeover bid is a scenario wherein one company attempts to acquire another company without the approval of the latter’s board of directors. This is usually done by buying a majority stake directly from the shareholders or by replacing the existing board to approve the acquisition.

Is a hostile takeover bid legal?

Yes, hostile takeover bids are legal. However, they might invite regulatory scrutiny to ensure fair practices, especially protecting shareholder interests.

How does a hostile takeover bid differ from a friendly takeover?

In a friendly takeover, the management of both the acquiring and target company agree to the terms of the acquisition. Conversely, in a hostile takeover bid, the acquiring entity tries to gain control without the consent of the target company’s board of directors.

Why would a company engage in a hostile takeover bid?

Companies engage in hostile takeover bids for several reasons, such as gaining access to new markets, acquiring patents or proprietary technology, reducing competition, or streamlining operations to save costs.

What is a poison pill strategy in relation to a hostile takeover bid?

A poison pill is a strategy that target companies use to detour hostile takeovers. It involves adopting policies or conditions that make the company less attractive to the acquirer, such as abruptly increasing the number of shares to dilute shareholder value.

What is a white knight in the context of a hostile takeover bid?

A white knight is a term used for a friendly company that buys a stake in a company facing a hostile takeover bid, with an intention to ward off the hostile bidder.

Can a hostile takeover bid be stopped?

Yes, a hostile takeover bid can be thwarted through various strategies like a poison pill, white knight defense, selling crown jewel assets, or mobilizing shareholder support against the takeover.

What are the potential outcomes of a hostile takeover bid?

The outcomes can significantly vary. The bidding company can gain control, leading to restructuring or selling of assets. If the bid fails, the target company may still face significant changes due to defensive strategies executed. A third party or white knight may also emerge, acquiring the company instead.

Are hostile takeover bids common?

While not as common as friendly mergers and acquisitions, hostile takeover bids constitute a significant portion of corporate activity, primarily in the fields where high-value assets or patents are involved.

Related Finance Terms

  • Shareholder Rights Plan
  • Poison Pill Strategy
  • Dilution of Ownership
  • White Knight Defense
  • Public Tender Offer

Sources for More Information

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