What Is a Predator?
A predator is a financially strong company that eats up another company in a merger or acquisition. The company that does the acquiring—or the predator—is said to have sufficient financial means to bear the risks associated with the acquisition.
- A predator is a solvent, financially strong company that seeks out a weaker company to acquire or to merge with.
- The weaker company in the equation is seen as the prey, with the business world applying the language of evolution in the real world to that of corporate takeovers.
- While the word predator seems to suggest a hostile takeover, the deals are often negotiated between the two companies.
- The predator company in the pairing is taking on financial risk by buying the weaker company, but the tradeoff is the capacity for expansion and greater market share.
- The prey loses its autonomy when its bought by the predator, but that may be a better alternative than what the prey was otherwise facing, namely, extinction.
Understanding a Predator
Predators are said to be very powerful firms that are financially strong. They are typically the ones who initiate any merger or acquisition activity. By contrast, those on the other end of the spectrum—or the ones who are the weaker targets of the predators—are called the prey. That's because they can be easily snatched up by corporations that are more powerful.
The term predator can have a negative connotation, especially in the case of hostile takeovers. But in some instances, a predator can also be the saving grace for a smaller company that is struggling and may not have any other option but to merge or be acquired.
Predators Are Just Part of the Business Landscape
Just like in the real world, big business is evolutionary. So it makes sense that the concept of predators and prey would exist in the corporate world. Every business goes through some sort of evolutionary phase—whether that's to grow and strengthen to become a predator, or to become the prey and get eaten up by the competition. Even though it may signal the end of the smaller, weaker business, a merger or acquisition leads to the expansion of the predator company.
Calculating the Predator's Steps
Even though strategic acquisitions can be a great way to expand, there can be considerable financial risk involved. The predator must do a careful analysis to ensure that it does not overpay for the target or the prey. It must also do its due diligence to make sure there are no surprises lurking in the target company.
Keeping Predators at Bay
Just because a company may be an attractive target for a predator, that does not mean it will always get swallowed up. In fact, there are ways in which the prey can keep predator companies away. For instance, the management team for the prey can all threaten to drop a people pill, or promise to resign en masse if the company is taken over.
Another way prey can protect itself from a predator is to use the poison pill strategy by making its stock less attractive to the company that wants to acquire it. The prey may also ward off takeovers through a golden parachute, or by offering big benefits like stock options or severance pay to top executives in the event it does get acquired by another company. By making these offers, the acquiring company would have to then take a financial hit by paying them out.
Example of a Predator
In June 2018, AT&T won court approval to take over Time Warner for $85.4 billion. Talks between the two companies began in 2016. By acquiring Time Warner, AT&T would be able to boost its own cable, wireless, and phone services by bundling them with television content from Time Warner. But the deal was blocked by the U.S. Justice Department, which sued over antitrust issues.
The department, along with antitrust experts, called for the companies to sell off some of the major parts of their businesses before merging. This was out of fear that a merger like this would lead to more industry consolidation and end up hurting consumers. But executives from the two companies refused, which led to a trial in court. The presiding judge decided to allow the merger to go forward.