When a firm is facing a hostile takeover attempt, it may issue a poison pill, which is

A proposed acquisition without the approval or consent of the target company

What is a Hostile Takeover?

A hostile takeover, in mergers and acquisitions (M&A), is the acquisition of a target company by another company (referred to as the acquirer) by going directly to the target company’s shareholders, either by making a tender offer or through a proxy vote. The difference between a hostile and a friendly takeover is that, in a hostile takeover, the target company’s board of directors do not approve of the transaction.

Example of a Hostile Takeover

For example, Company A is looking to pursue a corporate-level strategy and expand into a new geographical market.

1. Company A approaches Company B with a bid offer to purchase Company B.
2. The board of directors of Company B concludes that this would not be in the best interest of shareholders in Company B and rejects the bid offer.
3. Despite seeing the bid offer denied, Company A continues to push for an attempted acquisition of Company B.

In the scenario above, despite the rejection of its bid, Company A is still attempting an acquisition of Company B. This situation would then be referred to as a hostile takeover attempt.

Hostile Takeover Strategies

There are two commonly-used hostile takeover strategies: a tender offer or a proxy vote.

1. Tender offer

A tender offer is an offer to purchase stock shares from Company B shareholders at a premium to the market price. For example, if Company B’s current market price of shares is $10, Company A could make a tender offer to purchase shares of company B at $15 (50% premium). The goal of a tender offer is to acquire enough 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 being able to obtain a specified amount of shares. If not enough shareholders are willing to sell their stock to Company A to provide it with a controlling interest, then it will cancel its $15 a share tender offer.

2. Proxy vote

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. For example, Company A could persuade shareholders of Company B to use their proxy votes to make changes to the company’s board of directors. The goal of such a proxy vote is to remove the board members opposing the takeover and to install new board members who are more receptive to a change in ownership and who, therefore, will vote to approve the takeover.

Defenses against a Hostile Takeover

There are several defenses that the management of the target company can employ to deter a hostile takeover. They include the following:

• Poison pill: Making the stocks of the target company less attractive by allowing current shareholders of the target company to purchase new shares at a discount. This will dilute the equity interest represented by each share and, thus, increase the number of shares the acquirer company needs 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 their takeover attempt.
• Crown jewels defense: Selling the most valuable parts of the company in the event of a hostile takeover attempt. This obviously makes the target company less desirable and deters a hostile takeover.
• Supermajority amendment: An amendment to the company’s charter requiring a substantial majority (67%-90%) of the shares to vote to approve a merger.
• Golden parachute: An employment contract that guarantees expensive benefits be paid to key management if they are removed from the company following a takeover. The idea here is, again, to make the acquisition prohibitively expensive.
• Greenmail: The target company repurchasing shares that the acquirer has already purchased, at a higher premium, in order to prevent the shares from being in the hands of the acquirer. For example, Company A purchases shares of Company B at a premium price of $15; the target, Company B, then offers to purchase shares at $20 a share. Hopefully, it can repurchase enough shares to keep Company A from obtaining a controlling interest.
• Pac-Man defense: The target company purchasing shares of the acquiring company and attempting a takeover of their own. 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 Company B to have a lot of money to buy a lot of shares in Company A. Therefore, the Pac-Man defense usually isn’t workable for a small company with limited capital resources.

Real-life Examples of Hostile Takeovers

There are several examples of hostile takeovers in real-life, such as the following:

• Private equity firm KKR’s leveraged buyout of RJR Nabisco in the late 1980s. Read more about this transaction in the book, “Barbarians at the Gate.”
• Air Products & Chemicals Inc.’s hostile takeover attempt of Airgas Inc. Airgas Inc deterred the hostile takeover through the use of a poison pill.
• Sanofi-Aventis’s hostile takeover of the biotechnology company, Genzyme. Sanofi tendered more than $237 million worth of Genzyme shares, resulting in an equity ownership position of 90%.
• AOL’s hostile takeover of Time Warner in 1999. Due to the dotcom bubble bursting, the new company lost over $200 billion in value within two years.

Related Readings

CFI is a global provider of financial analyst training and career advancement for finance professionals. To learn more and expand your career, explore the additional relevant CFI resources below:

• Creeping Takeover
• Non-Controlling Interest
• White Squire
• Black Knight