Hostile vs. Friendly Takeovers: An Overview

Companies often grow by taking over their competitors, acquiring a hot startup, or merging with the competition. Public companies need the approval of their shareholders and board of directors in order to get a deal done. However, if managers are against an acquisition, the acquiring company can still make efforts to win the deal through so-called hostile measures.

Key Takeaways

  • Companies often grow by combining through acquisition or merger.
  • If a company's shareholders and management are all in agreement on a deal, a friendly takeover will take place.
  • If the acquired company's management is not on board, the acquiring company may initiate a hostile takeover by appealing directly to shareholders.

Hostile Takeovers

A hostile takeover occurs when one corporation, the acquiring corporation, attempts to take over another corporation, the target corporation, without the agreement of the target corporation’s board of directors.

In a hostile takeover, the target company's directors do not side with the acquiring company's directors. In such a case, the acquiring company can offer to pay target company shareholders for their shares in what is known as a tender offer. If enough shares are purchased, the acquiring company can then approve a merger or simply appoint its own directors and officers who run the target company as a subsidiary.

Hostile attempts to take over a company typically take place when a potential acquirer makes a tender offer, or direct offer, to the stockholders of the target company. This process happens over the opposition of the target company’s management, and it usually leads to significant tension between the target company’s management and that of the acquirer.

There are several strategies that a company can put in place to stave off a hostile takeover including poison pills, greenmail, and a white knight defense.

Friendly Takeovers

A friendly takeover occurs when one corporation acquires another with both boards of directors approving the transaction. Most takeovers are friendly, but hostile takeovers and activist campaigns have become more popular lately with the risk of activist hedge funds.

In a friendly takeover, both shareholders and management are in agreement on both sides of the deal. In a merger, one company, known as the surviving company, acquires the shares and assets of another with the approval of said company's directors and shareholders. The other ceases to exist as an independent legal entity. Shareholders in the disappearing company are given shares in the surviving company.

Special Considerations: Proxy Fights

A hostile takeover is usually accomplished by a tender offer or a proxy fight. In a tender offer, the corporation seeks to purchase shares from outstanding shareholders of the target corporation at a premium to the current market price. This offer usually has a limited time frame for shareholders to accept.

The premium over the market price is an incentive for shareholders to sell to the acquiring corporation. The acquiring company must file a Schedule TO with the SEC if it controls more than 5% of a class of the target corporation’s securities. Often, target corporations acquiesce to the demands of the acquiring corporation if the acquiring corporation has the financial ability to pull off a tender offer.

In a proxy fight, the acquiring corporation tries to persuade shareholders to use their proxy votes to install new management or take other types of corporate action. The acquiring corporation may highlight alleged shortcomings of the target corporation’s management. The acquiring corporation seeks to have its own candidates installed on the board of directors.

By installing friendly candidates on the board of directors, the acquiring corporation can easily make the desired changes at the target corporation. Proxy fights have become a popular method with activist hedge funds in order to institute change.