Imagine you’re a well-established corporation, confident in your business operations and growth potential. Then, one day, another company decides it wants to take over your business – without your consent. This is the reality of a hostile takeover, a situation where one company targets another for acquisition and proceeds to purchase it against its will.
In recent years, there have been several high-profile examples of hostile takeovers, highlighting the potential upheaval and impact they can have on both companies and investors. Let’s take a closer look at this phenomenon and explore some of the most interesting examples.
Defining Hostile Takeovers
According to Jessica Doyle, founder and principal of Two Creeks Strategies, a hostile takeover occurs when an acquiring company pursues a target company for acquisition, even if the target does not approve or cooperate. The acquiring company may try to engage in negotiations initially, but if those efforts are rejected, the takeover becomes hostile. This often involves the aggressive acquisition of shares and can be highly contentious and public.
Notable Examples
Hostile takeovers have made their way into the headlines on numerous occasions. Let’s look at a few notable examples:
Spirit Airlines Hostile Takeover:
After failed acquisition negotiations between JetBlue Airways and Spirit Airlines, JetBlue initiated a hostile takeover attempt. However, this attempt was rejected by shareholders, and the outcome is still uncertain.
Twitter Hostile Takeover:
Elon Musk, CEO of Tesla, successfully acquired Twitter through a hostile takeover, grabbing media attention during the highly publicized battle. Although shareholders benefited from a rise in share price, Twitter’s ad revenue has suffered since the acquisition.
Time Warner Hostile Takeover:
In one of the most aggressive bids, AOL acquired Time Warner through a hostile takeover during the dot-com boom. However, the merger faced significant challenges and ultimately resulted in a massive loss. Time Warner later split from AOL and was eventually acquired by AT&T.
The Impact on Investors
Hostile takeovers have a significant impact on shareholders. According to William Fiske, U.S. head of M&A and Contested Situations at shareholder consulting firm Georgeson, acquiring companies must appeal to investors to gain enough votes for a successful takeover. This often involves increasing the offer price, extending the offer deadline, and engaging with shareholders to negotiate a mutually agreeable deal.
During a hostile takeover attempt, the acquiring company’s actions can influence the stock price. Shares may rise in response to an offer, especially if it exceeds the previous valuation. Traders may become involved, hoping to profit from the potential acquisition. However, it’s important to note that the outcome of a hostile takeover can be uncertain, and investors should carefully consider the risks involved.
The Role of Universal Proxy Cards
Companies planning a hostile takeover may explore additional avenues to gain shareholders’ support, such as using universal proxy cards (UPCs). UPCs allow shareholders to vote through the proxy process as if they were voting in person. This enables potential acquirers to fill board seats with their preferred individuals and increase shareholder involvement.
Fiske explains that UPCs can facilitate targeted campaigns and potentially help activists win seats on the board. This further strengthens the potential acquirer’s position and increases the chances of a successful takeover.
Defending Against Hostile Takeovers
Target companies have several strategies to protect themselves and make an acquisition less desirable:
Poison Pill or Dilution:
Target companies can make the acquisition more expensive by issuing new shares to existing shareholders, thereby diluting the acquirer’s ownership. This tactic raises the cost of the takeover and serves as a deterrent.
Golden Parachute:
Executives can negotiate generous severance packages in the event of an acquisition, making the acquisition more costly and less attractive to potential acquirers. This tactic, known as a golden parachute, ensures that top-level employees are financially protected during the transition.
White Knight:
In some cases, target companies may seek out an alternative acquirer, known as a white knight, who is seen as more beneficial. This strategy is often employed when the potential acquirer shows determination despite the obstacles, and the target company prefers a different outcome.
The Unpredictable Nature of Hostile Takeovers
While hostile takeovers can present opportunities for both acquiring companies and investors, they also come with significant risks. Acquiring companies must navigate complex negotiations and shareholder approval, while target companies face the challenge of defending against an unsolicited takeover.
As we’ve seen from past examples, the outcome of a hostile takeover can be unpredictable. While some acquisitions result in long-term benefits for investors, others may lead to substantial losses. Investors and corporations alike must carefully evaluate the potential risks and rewards before engaging in a hostile takeover.
