The replacement of poor management is a potential source of gain from acquisition/takeover. Changing technological and competitive factors may lead to a need for corporate restructuring. If incumbent management is unable to adapt, then a hostile takeover is one method for accomplishing change. The primary reasons for a hostile takeovers can be the analysis that the target company is undervalued or has few strategic assets that directly complement the business of the acquiring company. The synergy of the resources can boost the growth trajectory of the acquiring company and can also increase its overall market share.
Hostile takeovers generally involve poorly performing firms in mature industries, and occur when the board of directors of the target is opposed to the sale of the company. In this case, the acquiring firm has two options to proceed with the acquisition tender offer or a proxy fight. A tender offer represents an offer to buy the stock of the target firm either directly from the firm’s shareholders or through the secondary market. In a proxy fight, the acquirer solicits the shareholders of the target firm in an attempt to obtain the right to vote their shares. The acquiring firm hopes to secure enough proxies to gain control of the board of directors and, in turn, replace the incumbent management. Another method is through stock purchases. The ownership of a public company is dictated by whoever owns the most shares. Any entity that can acquire more than 51% of the company shares will be the owner. A company or a group of investors may purchase shares in the open market to gain control over a target company. However, once a certain percentage is reached, purchases must be disclosed and would alert the target company of a possible takeover. This approach can only take an acquirer so far. Another takeover strategy is Down raids, which are referred to the sudden entry of the predator acquirer in the open markets. The acquirer company attempts to buy a significant stake in the target company at a higher than current value in a very short time. This also allows them the element of surprise and an opportunity to buy a controlling stake. This type of acquisition is followed by a further takeover offer or similar action over the course of an acquisition attempt.
For example, In 2011, one of the most famous hostile takeovers occurred when Microsoft sought to acquire Yahoo. Microsoft proposed a deal valued at $44.6 billion to merge with Yahoo. Yahoo’s management resisted this offer, believing it undervalued the company and was not in the best interests of shareholders. Microsoft proceeded to take its bid directly to Yahoo’s shareholders, sparking a contentious hostile takeover battle. Another example for hostile takeover is the Sanofi’s Acquisition of Genzyme. Pharmaceutical giant Sanofi successfully acquired Genzyme after its initial friendly approaches were rebuffed. Sanofi resorted to a Hostile Takeover strategy, going directly to Genzyme’s shareholders and finally acquiring the company by offering a premium price and contingent value rights. One example from India is the hostile takeover attempt by Reliance Industries Limited of L&T Finance in 2011. The former acquired a 14.98% stake in the subsidiary of the engineering conglomerate L&T, without L&T’s approval. There was a prolonged legal battle between the two companies to prevent the acquisition of L&T Finance.
Management in target firms will typically resist takeover attempts either to get a higher price for the firm or to protect their own self-interests. This can be done a number of ways. Target companies can decrease the likelihood of a takeover though charter amendments. With the staggered board technique, the board of directors is classified into three groups, with only one group elected each year. Thus, the suitor cannot obtain control of the board immediately even though it may have acquired a majority ownership of the target via a tender offer. Under a super majority amendment, a higher percentage than 50 percent, generally two-thirds or 80 percent’s required to approve a merger.
Other defensive tactics include poison pills and dual class recapitalizations. With poison pills, existing shareholders are issued rights which, if a bidder acquires a certain percentage of the outstanding shares, can be used to purchase additional shares at a bargain price, usually half the market price. Dual class recapitalizations distribute a new class of equity with superior voting rights. This enables the target firm’s managers to obtain majority control even though they do not own a majority of the shares.
Other preventative measures occur after an unsolicited offer is made to the target firm. The target may file suit against the bidder alleging violations of antitrust or securities laws. Alternatively, the target may engage in asset and liability restructuring to make it an unattractive target. With asset restructuring, the target purchases assets that the bidder does not want or that will create antitrust problems, or sells off the assets that the suitor desires to obtain. Liability restructuring maneuvers include issuing shares to a friendly third party to dilute the bidder’s ownership position or leveraging up the firm through a leveraged recapitalization making it difficult for the suitor to finance the transaction.
Other post offer tactics involve targeted share repurchases (often termed “greenmail”) in which the target repurchases the shares of an unfriendly suitor at a premium over the current market price and golden parachute, which are lucrative supplemental compensation packages for the target firm’s management. These packages are activated in the case of a takeover and the subsequent resignations of the senior executives. Finally, the target may employ an exclusionary self-tender. With this tactic, the target firm offers to buy back its own stock at a premium from everyone except the bidder.
Perhaps the most recent notable example of a hostile takeover is Elon Musk’s acquisition of Twitter. In 2022, Elon Musk initially acquired a 9.2% stake in Twitter and was invited to join the board. However, he later announced intentions to buy the company outright. Amid legal challenges and a Poison Pill defense from Twitter, Musk successfully acquired the platform. The takeover was marked by tumultuous negotiations, management shake-ups, and sweeping policy changes post-acquisition. Whether acquisition of Twitter by Elon Musk proves to be “successful” or “unsuccessful” is a matter of ongoing debate, but what is clear is that it illustrates how such acquisitions can become quite complex from both a legal and operational perspective.
A privately owned firm is not subject to unfriendly takeovers. A publicly traded firm “goes private” when a group, usually involving existing management, buys up all the publicly held stock. Such transactions are typically structured as leveraged buyouts (LBOs). LBOs are financed primarily with debt secured by the assets of the target firm.
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