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Hostile Takeover



Definition

A hostile takeover is a type of corporate acquisition or merger which is carried out against the wishes of the board of the target company. In this scenario, the acquiring company can go directly to the company’s shareholders or fight to replace management to get the acquisition approved. It typically happens when the stock of the targeted company is undervalued or the acquiring company sees strategic advantages.

Phonetic

The phonetic pronunciation of “Hostile Takeover” would be: “hah-stuhl tey-k-oh-ver”.

Key Takeaways

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  1. A Hostile Takeover often occurs when a company or individual acquires a majority stake in another company without the consent of the target company’s board of directors.
  2. It can disrupt a business’s existing operations and lead to a change in management and culture, as the acquiring entity tries to integrate the target company into its own.
  3. While often viewed negatively, a Hostile Takeover can stimulate growth, remove inefficient management, and potentially increase shareholder value.

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Importance

A hostile takeover is crucial in business and finance as it is a strategy used by corporations to acquire control over another company against the wishes of its management and board of directors. It plays an essential role in corporate governance, serving as a check and balance for management effectiveness, as it tends to occur when a company’s stock is undervalued or its performance is inadequate. It can also give the acquiring entity a chance to expand, diversify, or streamline its operations quickly. However, such takeovers can be disruptive and often lead to job losses, which is why they may be met with resistance. Despite the potential drawbacks, hostile takeovers are an integral part of the business landscape, driving competitiveness, innovation and ultimately, market efficiency.

Explanation

A hostile takeover is largely used as a strategy for corporate acquisitions and mergers. The primary aim of this business tactic is for one company (the bidding company) to gain control over another company (the target company) even when the management of the latter is resistant to the takeover. This strategy is typically exercised in the world of business when a company believes that the acquisition of another can significantly enhance its position, either by eliminating competition, gaining access to unique resources and technology, or expanding its operations for a broader market share.In many instances, the bidding company that initiates a hostile takeover seeks to harness the target company’s value, which it believes is not being effectively capitalized or fully utilized under the current management. Therefore, by taking control, the bidding company aims to exploit these strengths and extract more value. Most hostile takeovers are instigated through a variety of methods including tender offers, proxy fights, and leveraging buyouts. Although they may yield beneficial results for the bidding company, hostile takeovers are often seen as aggressive, disruptive, and can cause significant business and employee uncertainty.

Examples

1. Kraft Heinz and Unilever (2017): Kraft Heinz, backed by Warren Buffet’s Berkshire Hathaway, attempted a $143 billion hostile takeover bid for the British-Dutch consumer goods giant, Unilever. This plan was to combine two of the world’s largest packaged-food companies and create a global giant. However, Unilever promptly rejected the unsolicited offer, and Kraft Heinz withdrew its bid.2. PeopleSoft and Oracle (2003-2005): One of the tech industry’s most infamous hostile takeover attempts. Oracle Corporation publicly announced a $5.1 billion bid to acquire PeopleSoft. PeopleSoft initially rejected this bid, which led to a 18-month battle during which Oracle made several higher offers. Eventually the takeover was approved for $10.3 billion in 2005.3. Rio Tinto and BHP Billiton (2007-2008): BHP Billiton, the world’s largest mining company, proposed a hostile takeover bid worth around $150 billion for its competitor Rio Tinto, which would have been the second-largest merger in corporate history at that time. However, the deal fell apart in 2008 due to the financial crisis and concerns raised by regulatory authorities.

Frequently Asked Questions(FAQ)

What is a Hostile Takeover?

A hostile takeover is a type of corporate acquisition or merger which is carried out against the wishes of the board of the targeted company. This is usually done by the acquiring company aggressively purchasing large amounts of the target company’s stock on the open market.

How does a Hostile Takeover happen?

A hostile takeover can occur when an entity, such as a large corporation or individual investor, buys a significant amount of a target company’s stock. This can be done directly through a tender offer or indirectly by purchasing shares on the open market. In either case, the intention is to gain a controlling interest against the wishes of the target company’s board.

Why would a company carry out a Hostile Takeover?

An acquiring company might carry out a hostile takeover for several reasons, including gaining a competitive edge, acquiring new technologies or resources, expanding into new markets, or capitalizing on the target company’s undervalued assets.

What can a company do to resist a Hostile Takeover?

There are several defense mechanisms a company can employ to thwart a hostile takeover. These include the poison pill strategy (granting existing shareholders rights to buy additional shares at a discount, thus diluting the value of the acquired stock), staggered board of directors (which makes it harder to replace the entire board), a white knight strategy (finding a more preferred company to be acquired by), among others.

What are the effects of a Hostile Takeover on a company?

Upon successful hostile takeover, the acquiring company usually has the control and it may lead to a change in management and company’s strategy. It could also lead to a loss of jobs if the acquiring company decides to consolidate resources. However, it can also lead to increase in shareholder value if the acquiring company is able to better manage or utilize the acquired resources.

Are Hostile Takeovers legal?

Yes, hostile takeovers are perfectly legal. However, they must comply with securities laws and regulations, and are often subject to review by regulatory bodies to ensure no anti-competitive practices are being employed.

What is a friendly takeover?

A friendly takeover is the opposite of a hostile takeover. In a friendly takeover, the management of the target company supports the acquisition and helps facilitate the process.

What is the difference between a tender offer and a proxy fight in a Hostile Takeover?

A tender offer is a direct offer made to the shareholders of the target company to buy their shares for a specified price, usually above market value. A proxy fight, on the other hand, involves the acquiring firm persuading enough shareholders to use their proxy votes to install a new management team that is open to the takeover.

Related Finance Terms

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