A hostile takeover bid occurs when an entity attempts to take control of a publicly traded company without the consent or cooperation of the target company's board of directors. Since the board won't give its approval, the would-be acquirer has three methods at its disposal to gain control. The first is a tender offer, the second is a proxy fight, and the third is to buy the necessary company stock in the open market.
Breaking Down Hostile Takeover Bid
It is often challenging to acquire a controlling interest in a publicly-traded firm. There are multiple hostile takeover attempts in a typical year, but seldom are they effective. Reasons for wanting to acquire the company might be access to its distribution channels, client base, market share, technology, or because the acquirer thinks it can improve upon the target's current value and take advantage from stock price appreciation.
Hostile Takeover Bid Tactics
There are two main tactics employed to acquire a controlling interest. First, the acquirer may make a tender offer to the company's shareholders. A tender offer is a bid to buy a controlling share of the target's stock at a fixed price. The price is usually set above the current market price to allow the sellers a premium as an added incentive to sell their shares. This is a formal offer and may include specifications included by the acquirer such as an offer expiry window or other items. Paperwork must be filed with the SEC, and the acquirer must provide a summary of its plans for the target company to aid the target company's decision. Many takeover defense strategies protect against tender offers, so often the proxy fight is utilized.
The goal of a proxy fight is to replace board members who are not in favor of the takeover with new board members who would vote for the takeover. This is done by convincing shareholders that a change in management is needed and that the board members who would be appointed by the would-be acquirer are just what the doctor ordered. Once shareholders like the idea of a change in management, they are persuaded to allow the potential acquirer to vote their shares by proxy in favor of the new board member of their choice. If the proxy fight is successful, new board members are installed who will vote in favor of the target's acquisition.
If all else fails, a controlling share of the target's stock can be purchased publicly in the open market.