In an M&A transaction, a hostile takeover is the means by which a company wishing to acquire a target company seeks the approval of the target company’s shareholders, either by making a tender offer or through a proxy vote.
While a tender offer or a proxy vote might sound permissible, it is not: The difference between a hostile takeover and a friendly takeover is that in a hostile takeover, the target company’s board of directors do not approve of the transaction.
The maneuver is seen as hostile because the company seeking to make an acquisition bypasses the target company’s board of directors and instead pushes for the transaction by appealing to the target company’s shareholders.
Hostile Takeover Strategies
As cited above, there are two commonly used hostile takeover strategies: a tender offer or a proxy vote.
A tender offer is an offer to purchase stock shares from the target company’s shareholders at a premium to the market price. This clearly appeals to shareholders, because they can be paid a premium for their equity. The goal of a tender offer is for the acquiring company to obtain a sufficient enough number of voting shares to have a controlling equity interest in the target company.
Ordinarily, this means the acquirer needs to own more than 50% of the voting stock. In fact, most tender offers are made conditional on the acquirer’s being able to obtain a specified amount of shares. If not enough shareholders are willing to sell their stock to the acquiring company to provide it with a controlling interest, then it will cancel its tender offer, even if it is at a premium.
Considered the more hostile of the two, a proxy vote is the act of the acquirer company persuading existing shareholders to vote out the management of the target company so it will be easier to take over.
Shareholders have voting rights, so the acquiring company hopes that the existing shareholders can simply vote out the board and let the new management — approved by the acquiring company — install itself in place. The new management would then vote to approve the takeover.
Defending Against a Hostile Takeover
There are several defenses that the management of the target company can employ in order to defend itself against a hostile takeover. Some include the following.
In this strategy, the stock of the target company is made less attractive by allowing current shareholders of the target company to purchase new shares at a discount. By diluting the equity interest represented by each share, the acquiring company would need to increase the number of shares it would need to buy in order to obtain a controlling interest. The hope is that by making the acquisition more difficult and more expensive, the would-be acquirer will abandon its takeover attempt.
Crown Jewels Defense
Here, the management of the target company quickly sells off some of the most desirable parts of the company in order to make itself appear less attractive and less valuable to the acquiring company. Some of these assets might include intellectual property or real estate.
To deter a hostile takeover, the management of the target company moves to pass an amendment to the company’s charter requiring a substantial majority (67%–90%) of the shares needed to vote to approve a merger. This also makes the takeover more expensive, as the acquiring company would need to purchase more shares.
This is an employment contract that guarantees expensive benefits to be paid to key management in the event that they are removed due to a takeover. This makes the acquisition prohibitively expensive, and oftentimes golden parachutes are in place long before the beginning of a hostile takeover.
In this strategy, the target company simply repurchases the shares that the acquirer has already purchased, at a higher premium, in order to prevent the acquiring company from obtaining a controlling interest.
In a quirky, unexpected move, instead of being acquired, the target company purchases shares of the acquiring company and attempts to take it over first. The acquirer will abandon its takeover attempt if it believes it is in danger of losing control of its own business. This strategy obviously requires substantial capital at the ready for the target company, and isn’t feasible for smaller companies with limited capital resources.
Why a Virtual Data Room for Hostile Takeovers?
Considering the need for speed during a hostile takeover — whether for the acquiring company wishing to take over a company by tender offer or proxy vote, or the target company wishing to employ defensive measures — a virtual data room (VDR) provides all that is needed to maintain privacy, security and organization. The volume of documents can escalate quickly, with various parties cycling through the transaction process, but a VDR has all bases covered, with 99% uptime and the ability to access documents and data anytime, anywhere, and on any device.
When organizations need more than just a version of cloud document management, they should consider an enterprise document security solution like Caplinked that has years of experience providing data rooms for sensitive and complex transactions. Start your free trial today.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
The Corporate Finance Institute – What is a Hostile Takeover?