A hostile takeover is when a company (the “acquirer”) attempts to take control of another company (the “target”) against the wishes of the target company’s management or board of directors. These types of acquisitions can lead to significant changes in the target company’s operations, strategy, and ownership structure, often creating tension between the two firms. In this blog, we will explore what constitutes a hostile takeover, present real-world examples, and discuss safeguards that companies can implement to protect themselves from hostile bids.
What is a Hostile Takeover?
In a hostile takeover, the acquirer bypasses the target company’s management and directly seeks to buy shares from its shareholders. This can be done in one of two main ways:
- Tender Offer: The acquirer makes an offer directly to the target’s shareholders to purchase their shares at a premium to the market price.
- Proxy Fight: The acquirer tries to gain control of the company by persuading shareholders to vote out the current board of directors and replace them with directors who are more favorable to the takeover.
Real-World Examples of Hostile Takeovers
- Kraft Foods and Cadbury (2009-2010)
One of the most high-profile hostile takeovers in recent history occurred when Kraft Foods attempted to acquire the British confectionery giant Cadbury. Initially, Cadbury’s management rejected Kraft’s offers, claiming they undervalued the company. Kraft went public with its bid and launched a tender offer directly to shareholders, ultimately succeeding in acquiring Cadbury for around £11.5 billion. The takeover was controversial and met with resistance from Cadbury’s employees and UK regulators, but Kraft’s persistence and the premium offered to shareholders eventually secured the deal. - InBev and Anheuser-Busch (2008)
In 2008, Belgian-based InBev launched a hostile takeover bid for Anheuser-Busch, one of the largest beer companies in the United States. The bid was valued at $46 billion and was initially rejected by Anheuser-Busch’s board. However, InBev bypassed the board and made a direct offer to shareholders, who ultimately accepted the deal. The merger created Anheuser-Busch InBev, one of the largest beer companies in the world, but the hostile takeover resulted in significant changes to Anheuser-Busch’s leadership and corporate culture. - Yahoo and Microsoft (2008)
Microsoft made a hostile bid to acquire Yahoo in 2008 for $44.6 billion. Yahoo’s board rejected the offer, but Microsoft continued to pursue a deal, believing it would strengthen their position in the online advertising market. Eventually, Yahoo’s management and board resisted the takeover, and Microsoft withdrew its bid. Despite this, the threat of the takeover had a lasting impact on Yahoo, which struggled to recover its market position afterward.
Safeguards Against Hostile Takeovers
Hostile takeovers can be damaging to a company’s autonomy, culture, and long-term strategy. To prevent unwanted acquisitions, companies can implement several defensive measures:
- Poison Pill Strategy (Shareholder Rights Plan)
A poison pill is a defense mechanism where the target company makes its stock less attractive or more expensive to the acquirer. One common type is the “flip-in” poison pill, which allows existing shareholders (excluding the acquirer) to purchase additional shares at a discount, thereby diluting the acquirer’s ownership stake. This makes the takeover more expensive and less appealing. For example, Netflix used a poison pill in 2012 when activist investor Carl Icahn sought to acquire a large stake in the company. - White Knight Defense
A white knight is a friendly company that comes to the rescue of a target company by making an alternative, friendly takeover offer. This is often seen as a way to avoid the acquirer’s hostile bid. For example, in the case of the 1980s takeover battle for U.S. healthcare company Safeway Stores, the company sought a white knight in the form of a rival, which helped prevent a hostile acquisition by a less friendly bidder. - Golden Parachutes
Golden parachutes are large financial packages offered to top executives in the event that they are terminated following a change in control, such as a hostile takeover. These packages can include cash bonuses, stock options, and other benefits that make it more expensive for the acquirer to proceed with the takeover. A golden parachute may discourage acquirers from pursuing hostile bids, especially if the payout is substantial. This was a significant issue in the case of defense contractor Lockheed Martin’s merger with Martin Marietta in the early 1990s. - Staggered Board of Directors
A staggered board (or classified board) is a governance structure where only a portion of the board of directors is up for re-election in any given year. This makes it more difficult for an acquirer to quickly replace the entire board and gain control of the company. In many cases, the target company’s board will use this defense to slow down or block a hostile takeover. - Crown Jewel Defense
In a crown jewel defense, a company may sell off its most valuable assets (the “crown jewels”) to make the company less attractive to the acquirer. This is a risky strategy, as it can undermine the company’s long-term value, but it may deter hostile bidders if they are no longer able to acquire the company’s most prized assets. - Supermajority Voting Requirements
Some companies require a supermajority vote for significant changes in corporate structure, such as mergers or acquisitions. This means that a hostile bidder would need approval from a larger percentage of shareholders than is typically required. The supermajority requirement makes it more difficult for hostile bidders to take control without broad support from the shareholder base.
Conclusion
Hostile takeovers are a complex and often contentious aspect of corporate strategy. While they can lead to significant financial gains for shareholders, they also come with risks, particularly for the target company’s leadership and culture. In response, many companies implement a variety of defensive tactics to safeguard against unwanted bids. Understanding both the risks and the defensive strategies is essential for companies looking to navigate the challenging waters of mergers and acquisitions.
As the examples above show, hostile takeovers are not always successful, especially when the target company employs effective defenses. However, the sheer potential for upheaval makes it crucial for both acquirers and target companies to approach these situations with careful planning and strategy.