What is a hostile takeover?

In an acquisition, or takeover, a target company agrees to be purchased and becomes part of an acquiring company. A hostile takeover, however, is an unsolicited acquisition of a company in which the acquirer makes an offer directly to the company shareholders without the approval of the board of directors, or moves to replace the management.

Where have you heard of a hostile takeover?

Hostile takeovers tend to attract attention in the markets and business media. The share prices of the target company and the acquiring company can react strongly, based on how the market perceives the potential tie-up.

Well-publicised hostile takeover examples include US communications companies AOL and Time Warner, US food company Kraft Foods and UK confectionery Cadbury, and French pharmaceutical company Sanofi Aventis with US biotechnology company Genzyme.

What do you need to know about a hostile takeover?

A company may reject a takeover offer if the board of directors or shareholders do not find it acceptable. Hostile takeovers can also be halted by courts, regulators or governments if they do not view the acquisition as beneficial to the market or national security. For example, the US government prevented technology company Broadcom (AVGO) from executing a hostile takeover of rival Qualcomm (QCOM) in 2017, citing competitive threats from Chinese companies. Another instance was when the French court suspended water and waste management firm Veolia's (VIE) hostile takeover of rival Suez (SEV) in November 2020, ruling that unions should be consulted.

There are several ways an acquiring company can launch a hostile takeover:

• Tender offer. The acquirer makes an offer to shareholders in the target company to tender, or sell, their shares at a premium to its market value.

• Proxy battle. The acquirer convinces a majority of shareholders in the target company to replace the management team opposed to the takeover with a new team that will approve the deal.

• Creeping tender offer. The acquirer buys enough shares in the target company on the open market to gradually gain control.

There are also several ways a target company can block a hostile takeover attempt. These include:

• Poison pill. Gives shareholders other than the acquirer the right to buy additional shares at a substantially discounted price to dilute the acquirer’s share of the company and make it harder to buy a controlling stake. Typically triggered if a potential acquirer accumulates a 10-30 per cent stake.

• Stock repurchase. The target company acquires its own shares from its shareholders to retain control.

• Staggered board. By staggering terms for board directors, only some are re-elected each year, making it harder for an acquirer to launch a proxy battle.

• Leveraged buyout. The management team purchases the target company using debt financing, increasing the company’s debt burden and making it less attractive to acquire.

• Greenmail. The target company buys its own shares from the acquirer for a premium over the market value.

• Golden parachutes. The target company agrees to compensate its management team in the event their employment is terminated following a hostile takeover, reducing the company’s assets.

• White knight or white squire defence. The target company sells control to a white knight or a partial stake to a white squire. These are friendly investors or companies that prevent a hostile acquirer from taking control.