Hostile takeover

Hostile takeover

A hostile takeover is a corporate acquisition in which one company, known as the acquiring company or the “raider,” seeks to take control of another company, known as the target company, against the desire of the target company’s management and board of directors. A hostile takeover is a difficult and sometimes controversial procedure that might greatly impact the shareholders of the firms involved, the overall business environment, and the companies themselves.  

What is a hostile takeover? 

A hostile takeover, also known as an unsolicited takeover, is a scenario in which one company (the acquirer) aggressively pursues the acquisition of another company (the target) without the approval or consent of the target’s management and board of directors. This aggressive approach typically involves the acquirer making a direct offer to the target’s shareholders, bypassing traditional negotiation channels. Hostile takeovers can be contentious and often lead to significant conflicts between the involved parties. 

Understanding hostile takeover 

To fully appreciate the complexities of this business strategy, it is necessary to comprehend the dynamics of a hostile takeover. The reasons behind such acquisitions, the varied strategies acquirers’ use, and the legal and regulatory structure that oversees them are important factors. 

• Motivations for hostile takeovers 

Hostile takeovers are driven by various motivations, with financial gain often being a primary objective for acquirers. Some of the key motivations include: 

• Value creation 

Acquirers believe that merging with the target will create synergies, leading to increased operational efficiency, reduced costs, and higher profitability. 

• Asset acquisition 

The target company possesses valuable assets, such as intellectual property, market share, or strategic locations, which the acquirer aims to control. 

• Tactics in hostile takeovers 

Hostile takeovers involve a range of tactics that acquirers use to gain control of the target company. These tactics are often aggressive and can include: 

• Tender offers 

Purchasers directly approach shareholders of the target firm with offers to buy their shares at a premium above the going market rate. 

• Proxy contests 

Acquirers compete to elect directors to the target company’s board of directors who will be more supportive of the acquisition. 

• Acquiring shares 

Acquirers may progressively acquire a sizable portion of the target company’s shares on the open market, gaining voting power. 

Legal and regulatory framework 

Hostile takeovers are conducted within the bounds of existing legal and regulatory frameworks governing corporate acquisitions. In the United Kingdom, for example, the City Code on takeovers and mergers provides guidelines for conducting takeovers, whether they are friendly or hostile. Key regulatory aspects include: 

• Acquirers must inform regulatory agencies and the general public about their plans and stakes in the target firm. 
• Regulations frequently seek to guarantee that all shareholders are treated equally and that no preferential or selective agreements are made. 
• To prevent hostile takeovers, the target firm may use a variety of takeover defences, such as poison pills. 

History of hostile takeover 

Hostile takeovers have a rich history dating back several decades. They have been pivotal in shaping the corporate landscape, influencing strategies, and prompting regulation changes.  

When financier Daniel Drew and railroad magnate Jay Gould tried to seize possession of the Erie Railroad via boardroom battles and stock manipulation in the 19th century, it was regarded as one of the first hostile takeovers. A key period for hostile takeovers was the 1980s, which saw high-profile incidents like the failed attempt to acquire RJR Nabisco, immortalised in the novel and movie “Barbarians at the Gate.” 

Benefits of a hostile takeover 

While hostile takeovers are often viewed negatively due to their contentious nature, they are not without their perceived benefits. 

• Market discipline 

Hostile takeovers operate as a type of corporate governance, driving underperforming firms to improve their practices and shareholder value to discourage possible suitors. 

• Efficiency improvement 

To fend off the acquirer, hostile takeovers frequently encourage the targeted companies to reassess their operations, eliminate inefficiency, and boost productivity. This may result in better management and efficiency as a whole. 

• Shareholder value 

As a result of an acquisition price greater than the market value, shareholders of the target companies might earn a premium on their shares. For long-term investors, this may be quite profitable. 

• Wealth redistribution 

Wealth is frequently transferred from underperforming businesses to more effective ones, supporting the market’s general health and vitality. 

Example of hostile takeover 

The 2014 attempt by Pfizer to acquire pharmaceutical titan AstraZeneca is one example of a hostile takeover. In what turned out to be a highly publicised and acrimonious deal, AstraZeneca, a British pharmaceutical company, was sought by Pfizer, a pharmaceutical corporation with US headquarters. 

Another prominent example of a hostile takeover was Comcast’s 2018 attempt to acquire American entertainment giant 21st Century Fox. Unlike Disney, who initially agreed to take over Fox through a friendly merger, Comcast submitted an unsolicited offer to buy Fox’s assets, notably its television and film studios. By starting a bidding war, Comcast’s aggressive offer increased the purchase price and pressured Fox’s board of directors to examine Comcast’s offer seriously. Disney ultimately won the bidding conflict and bought most of Fox’s assets. This hostile takeover scenario shows how high-stakes offers may derail business mergers and acquisitions. 

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