Loading the player...

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'

A hostile takeover bid occurs when an entity attempts to take control of a firm without the consent or cooperation of the target company's board of directors. In lieu of the target company's board approval, the would-be acquirer may then issue a tender offer, employ a proxy fight or attempt to buy the necessary company stock in the open market. To deter the unwanted takeover, the target company's management may have preemptive defenses in place, or it may employ reactive defenses to fight back.

Factors playing into a hostile takeover from the acquisition side often coincide with those of any other takeover, such as believing that a company may be significantly undervalued or wanting access to a company's brand, operations, technology or industry foothold. Hostile takeovers may also be strategic moves by activist investors looking to effect change on a company's operations.

Hostile Takeovers Through Tender Offers and Proxy Fights

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, usually a majority, agree to accept the offer. The Williams Act of 1968 regulates tender offers and requires the disclosure of all cash tender offers.

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

Preemptive Hostile Takeover Defenses

To protect against hostile takeovers, a company can establish stocks with differential voting rights (DVR), where a stock with less voting rights pays a higher dividend. This makes shares with a lower voting power an attractive investment, while making it more difficult to generate the votes needed for a hostile takeover if management owns a large enough portion of shares with more voting power. 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. Employees may be 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, thereby making it less attractive as a takeover opportunity.

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.

Hostile Takeover Examples

A hostile takeover can be a difficult and lengthy process, and attempts often end up unsuccessful. In 2011, for example, billionaire activist investor Carl Icahn attempted three separate bids to acquire household goods giant Clorox, which rejected each one and introduced a new shareholder right plan in its defense. The Clorox board even sidelined Icahn's proxy fight efforts, and the attempt ultimately ended in a few months with no takeover. For more on noteworthy hostile takeovers, including the $4.9 billion leveraged buyout of cigarette and food giant RJR Nabisco by investment firm KKR, see What are some prominent examples of hostile takeovers? 

RELATED TERMS
  1. Hostile Takeover Bid

    A hostile takeover bid occurs when an entity attempts to take ...
  2. Takeover

    A takeover occurs when an acquiring company makes a bid in an ...
  3. Takeover Bid

    A takeover bid is a corporate action in which an acquiring company ...
  4. Black Knight

    A black knight is a company that makes an unwelcome takeover ...
  5. Anti-Takeover Measure

    In order to block hostile bids for control of a company, the ...
  6. Killer Bees

    Killer bees helped companies avoid takeovers, during the 198 ...
Related Articles
  1. Investing

    Trademarks of a Takeover Target

    These tips on finding viable takeover targets can lead you to little companies with big prospects.
  2. Investing

    Shareholders: Vote Your Proxy and Be Heard

    Voting shares, in person or via proxy ballot, is a right every shareholder should exercise. Here's why.
  3. Know Your Shareholder Rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company.
  4. Trading

    Qualcomm Stock Moves Lower Despite Earnings Beat

    Qualcomm shares moved lower following the company's first quarter results, but traders will be watching these key levels.
  5. Investing

    Unilever Asks UK Govt. for ‘Level Playing Field’

    The company wants to extend the time allowed for takeover targets to defend themselves.
  6. Insights

    Failed Takeovers During The Recession

    Takeover attempts were popular in late 2008 to 2009, but some deals just didn't make it.
  7. Investing

    Proxy Season 2016: Most Wonderful Time of the Year

    Each year, public companies hold shareholder meetings where individual and institutional investors vote on the future. Here is what to watch in 2016.
  8. Trading

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.
  9. Trading

    Defense Stocks Could Rally After North Korea Saber-Rattling

    North Korea's rejection of U.S. disarmament demands could signal renewed hostilities and a defense stock buying opportunity.
RELATED FAQS
  1. A Hostile Takeover vs. Friendly Takeover

    Learn about the difference between a hostile takeover and a friendly takeover, and understand how proxy fights and tender ... Read Answer >>
  2. What happens to the shares of a company that has been the object of a hostile takeover?

    Learn about the effect on the share price of companies that are targets of hostile takeovers, which are tactics used by famed ... Read Answer >>
  3. How can a company buy back shares to fend off a hostile takeover?

    Learn about why a business might use a stock buyback to thwart a hostile takeover attempt by reducing its total assets and ... Read Answer >>
  4. What is the significance of a Schedule 13D?

    A Schedule 13D is significant because it provides investors with useful information on everything an investor could want ... Read Answer >>
  5. What is the difference between a "flip-in" and "flip-over" poison pill?

    Learn about strategies used to defend against hostile takeovers, what a poison pill is and the difference between a flip-in ... Read Answer >>
  6. What Are Some of the Top Hostile Takeovers of All-Time?

    Learn about some of the most noteworthy hostile takeovers in history, including the KKR acquisition of RJR Nabisco and the ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center