Hostile Takeover

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What is a 'Hostile Takeover'

A hostile takeover is the acquisition of one company (called the target company) by another (called the acquirer) that is accomplished by going directly to the company's shareholders or fighting to replace management to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight.

The key characteristic of a hostile takeover is that the target company's management does not want the deal to go through. Sometimes a company's management will defend against unwanted hostile takeovers by using several controversial strategies, such as the poison pill, the crown-jewel defense, a golden parachute or the Pac-Man defense.

BREAKING DOWN 'Hostile Takeover'

When a hostile bid is made, the target may have preemptive defenses in place or it may employ reactive defenses to fight back.

Tender Offer or Proxy Fight

When a company, an investor or a group of investors makes a tender offer to purchase the shares of another company at a premium above the current market value, the board of directors might reject the offer. The acquiring company can take that offer directly to the shareholders, who may choose to accept it if it is at a sufficient premium to market value or if they are unhappy with current management. The sale of the stock only takes place if a sufficient number of stockholders agree to accept the offer.

In a proxy fight, opposing groups of stockholders persuade other stockholders to allow them to vote their shares. If a company that makes a hostile takeover bid acquires enough proxies, it can use those proxies to vote to accept the offer.

Preemptive Takeover Defenses

A company can establish stocks with differential voting rights (DVR); a stock with less voting rights pays a higher dividend. This makes it an attractive investment but it becomes harder to generate the votes needed for a hostile takeover. Another defense is to establish an employee stock ownership program (ESOP), which is a tax-qualified plan in which employees own substantial interest in the company. They are more likely to vote with management, which is why this can be a successful defense. In a crown jewel defense, a provision of the company's bylaws requires the sale of the most valuable assets if there is a hostile takeover.

Reactive Defenses

Officially known as a shareholder rights plan, a poison pill defense allows existing shareholders to buy newly issued stock at a discount if one shareholder has bought more than a stipulated percentage of the stock; the buyer who triggered the defense is excluded from the discount. The term is often used broadly to include a range of defenses, including issuing both additional debt to make the target less attractive and stock options to employees that vest upon a merger. A people pill provides for the resignation of key personnel in the case of a hostile takeover, while the Pac-Man defense has the target company aggressively buy stock in the company attempting the takeover.

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