Introduction to Hostile Takeover
A takeover by an acquiring company of the Target company is termed as ‘Hostile Takeover’ when the offer made by the acquiring company to the Board of Directors or the management of the Target company is originally refused but the acquiring company tried another way around to acquire the company’s business.
Explanation
The company which seems interested in acquiring other company’s business, usually provide their offer price to the top management of the target company. But it is not necessary that the management or board of directors of the target company should accept the offer. In case the management of the target company refuse the offer and the idea of letting their company get acquired by other company, the acquirer company may use other means to persuade the management of the target company to accept the offer. This type of taking over or acquiring the business of other firm or entity is termed as Hostile Takeover.
Characteristic of Hostile Takeover
Hostile takeover required different characteristics in the particular takeover transaction:
- The hostile takeover required the involvement of two parties. One is the target company whose management has got an offer for the proposal of possible merger and the other party is the acquirer company who is an interested party who has given a proposal for the merger.
- The bid or offer of the acquirer company should not be acceptable to the management of the target company and should be refused by the management.
- After the offer got refused by the management of the target company, the acquirer company should opt for other strategies to get approval from the management of the target company for the possible merger and acquisition.
Examples of Hostile Takeover
For a better understanding of the concept, let’s assume a company ABC Inc. who is a new growing company in the market with a positive trendsetter in the market. Seeing the growth of the company and the future prosperity and opportunity of the company, another company PQR Inc. decided to acquire the company and its business. For the same, PQR Inc. will be termed as ‘Acquirer Company’ whereas ABC Inc. will be termed as the target company. For acquiring the target company, the acquirer company will provide his bid price to the management and board of the target company. Seeing the bid price and the offer, the management of the target company decide not to sell its business and rejected the offer. Even after the rejection, the acquirer company did not give up its proposition and tried different ways to persuade the management of the target company to change its decision and let the company be acquired. This type of takeover is termed as Hostile Takeover.
Strategies of Hostile Takeover
After the rejection of the initial offer made by the acquirer company by the management of the target company, the acquirer company can opt one of the following two strategies for the takeover transaction:
- Tender Offer: In this strategy, after the refusal from the management for the initial offer proposed to them by the acquirer company, the acquirer company tries to acquire the shares in the market at a premium to have the control of the voting power amounting to 50% or more of the total voting power. Doing so, the acquirer company can manipulate and force the management of the target company to approve of the approval.
- Proxy Vote: In this strategy, the acquirer company after being refused for their initial offer for the acquisition of the target company, tries to change the members of management for the decision to be in their favour. For such to happen, the acquirer company will convince the shareholders to exercise their proxy vote and try to change the members of the management who are opposing the takeover and replace them with the new members who are more reliable and receptive to the decision of takeover and give their decision for the change of ownership of the business.
Difference between Hostile Takeovers and Friendly Takeovers
In the traditional way of the takeover, the acquirer company make their offer to the top management of the target company and based on the offer, if the management like the offer they accept it and the further process of acquiring or taking over the company begins. This traditional way of takeover is termed as Friendly takeovers. Whereas in the case of Hostile Takeover, the management of the target company initially rejects the offer provided by the acquirer company as they don’t want to change the ownership of the business company.
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In case of a friendly takeover, the process is simple and less time consuming as the initial offer of the acquirer company gets accepted by the target company and further process of merger could be started. Whereas in case of the hostile takeover, the process is more time consuming as in both the target strategy and the proxy vote strategy, the process takes more time for just getting on board with the merger decision from the management of the target company.
Advantages and Disadvantages
There are several benefits in case of a hostile takeover:
- The shareholders of the target company get to sell their shares at a premium or could be said at a value that is quite above the market price of the shares.
- The acquirer company is mostly the one who logically benefited from the hostile takeover as they get the assets of the target company and get to acquire the business of the target company that may benefit them in long terms.
The hostile takeover is not always beneficial for the acquirer company:
- In hostile takeover instead of getting relevant information and data from the target company (as in friendly takeover), the acquirer company has to rely on the information gathered from outsourcing, which may not be reliable as much as original source.
- After the acquisition, the acquirer company may found any hidden debt which may be deteriorating in the future of the acquirer company.
Conclusion
Mostly it could be said that the target company gets benefited in case of the hostile takeover as their shareholders get premium at the redemption of their shares. But it is not foreseeable that the acquirer company will always get benefited as they have to incur huge debts to pay off the shareholder of the target company and thus this may result into the downfall in the market price of the shares of the company as well as there is the possibility that the actual situation of the target company may differ from the data gathered by the acquirer company from the outsources.
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