The shares of a company that is the object of a hostile takeover rise. When a group of investors believe management is not fully maximizing shareholder value, they make an offer directly to shareholders for their stock at a premium to the market price. Concurrently, they engage in tactics to replace management and make the case to shareholders, financial media and the public that the company would be better off with new management.
All of these actions create additional demand for shares while creating an acrimonious battle for control of the company. Hostile takeovers are a referendum on management. Shareholders have to weigh their faith in management's long-term vision against the potential of quick profits.
Mergers and acquisitions activity increases when interest rates are low and financial conditions are conducive, as money can be raised for ambitious takeovers. This environment is also bullish for stocks in general, as low interest rates enhance the appeal of stocks. Hostile takeovers, even if unsuccessful, typically lead management to make shareholder-friendly proposals as an incentive for shareholders to reject the takeover bid.
These proposals include special dividends, dividend increases, share buybacks and spinoffs. All of these measures drive up the price of the stock in the short-term and longer-term. Special dividends are one-time payouts to shareholders. Dividend hikes are bullish catalysts, making the stock more attractive especially in low-rate environments. Share buybacks create a steady bid for the stocks and reduce the supply of stock. Spinoffs are strategic decisions to divest noncore business units to create higher valuations and provide a more-focused vision and business for shareholders.