Hostile Takeover

In the dynamic world of mergers and acquisitions, a hostile takeover stands out as one of the most aggressive strategies employed by companies seeking to acquire another firm against the will of the target’s board. This comprehensive blog delves into the intricacies of hostile takeovers, exploring how they work, the strategies involved, defenses employed by target companies, and real-life examples that have shaped the corporate landscape.

What is a Hostile Takeover?

A hostile takeover occurs when a company seeking to acquire another faces opposition from the target company’s board. This opposition can stem from various reasons, such as the target’s shares being undervalued, concerns that the acquirer might diminish shareholder value, potential asset sell-offs crucial to the company, the likelihood of significant employee layoffs including the dismissal of target’s management, or a cultural misalignment between the two companies.

When the target company’s board believes that the transaction will not be mutually beneficial, it results in aggressive actions by the acquirer and defensive measures by the target. In essence, a hostile takeover becomes a battle for corporate control.

Hostile Takeover Strategies

A company attempting a hostile takeover typically employs one or more of three main strategies:

Tender Offer

Without the approval of the target company’s board, the acquiring company / individual makes a public tender offer directly to the shareholders. This offer includes a premium price which is higher than the current market value, to encourage shareholders to sell their shares. Making such a public tender offer without the board’s endorsement openly announces the hostile takeover, often leading to a short-term increase in the target company’s share price.

Open Market Purchase

In this approach, the acquiring company quietly and gradually buys shares of the target company on the open market. Investment banks often assist by purchasing shares on behalf of the acquirer, although regulatory frameworks often require disclosure when ownership crosses specific thresholds. For example, in the U.S., acquiring 5% or more of a company’s voting shares triggers a disclosure obligation through a Schedule 13D or 13G filing. This makes it difficult to accumulate a considerable stake quietly, as declaring such ownership can alert the target’s board, prompting them to put defenses in place. While this method can help avoid immediate price surges associated with a public tender offer, building a meaningful stake takes time and requires careful navigation of beneficial ownership rules. The goal isn’t necessarily to acquire a majority (over 50%) but to build enough ownership to influence or persuade the target’s board.

Proxy Fight

The acquiring company seeks to convince key large shareholders to vote out opposing board members and replace them with individuals who support the takeover. By reshaping the board in this way, the acquirer aims to facilitate the acquisition without further resistance. This strategy is usually the most time-consuming, involving the organization of shareholder meetings, extensive communication with shareholders, and potential legal hurdles.

Insight: In practical scenarios, companies often begin with open market purchases and proxy fights before proceeding to a tender offer. The acquirer’s aim is typically to secure a controlling stake of 51%. Once this control is achieved, the acquiring company can choose its preferred course of action, such as merging the two firms or selectively divesting non-core assets.

Hostile Takeover vs. Friendly Acquisition

Aspect	Hostile Takeover	Friendly Acquisition
Board Approval	Not obtained; acquirer bypasses management	Obtained; negotiations occur with board consent
Approach	Aggressive, may involve public offers or proxy fights	Cooperative, with agreed terms and conditions
Negotiations	Minimal or none with current management	Extensive discussions to reach mutually beneficial terms
Shareholder Role	Directly targeted to sell shares or vote for new board members	Informed and vote based on board’s recommendation
Share price	Short term rise in share price. It may remain volatile due to speculation and defensive measures	Deal value is negotiated to reflect fair value

Defenses Against a Hostile Takeover

To preserve its independence, continue planned initiatives, and pressure the bidder to offer the best price in order to maximize shareholder wealth, the target company may adopt defenses against a hostile takeover. These strategies are broadly divided into two categories: Preventive Defenses and Reactive Defenses.

Preventive Defense

Preventive Defense are defense strategies that are constructed and implemented well in advance, prior to actual attack from the hostile bidder, making a potential acquisition costly, cumbersome, or both. Following are the key preventive defenses available to the target company:

Poison Pills

• Flip-in Poison Pill: Provides the right to target’s existing shareholder, except the acquirer, to purchase shares of the target company at a discount.
• Flip-over Poison Pill: Provides the right to target’s existing shareholder, except the acquirer, to purchase shares of the merged entity at a discount.
• When to use which one and its effects: The choice between a flip-in and a flip-over poison pill depends on the strategic goals of the target company. A flip-in poison pill is often preferred when the objective is to immediately dilute the acquirer’s ownership and make the acquisition more expensive, thereby discouraging further purchases. On the other hand, a flip-over poison pill can be more effective if the target anticipates a merger or wants to deter hostile bidders by making the post-merger entity less attractive to the acquirer, ensuring that existing shareholders benefit from future value at a discount.

However, empirically, boards often prefer to incorporate both options simultaneously when adding these amendments to the company’s charter, giving themselves the flexibility to activate or amend them as needed, depending on what best serves the company’s interests at any given moment.

For further details on poison pills, click here.

Staggered Board

• Description: The board of directors is divided into different classes with staggered terms, so only a fraction of board members are up for election each year.
• Effect: Makes it difficult for an acquirer to quickly gain control of the board, as it would take multiple election cycles to replace a majority of directors.

Golden Parachutes

• Description: Lucrative benefits guaranteed to key executives if they are terminated after a change of control, such as an acquisition.
• Effect: Increases the cost of the takeover by obligating the acquirer to pay substantial sums to executives, thereby making the acquisition less appealing.

Dual-Class Shares

• Description: Issuing shares with different voting rights. For example, Class A shares might have one vote per share, while Class B shares have ten votes per share.
• Effect: Concentrates voting power in the hands of a few (often founders or insiders), making it practically challenging for an outsider to gain control through share acquisition.

Reactive Defense

Reactive Defense strategies are deployed after a hostile takeover has been initiated, aiming to make the acquisition costly or difficult. Following are the key reactive defenses available to the target company:

White Knight

• Description: Seeking a more friendly company to acquire the target instead of the hostile bidder.
• Effect: Preserves the target company’s interests and often retains current management, while the white knight fends off the hostile takeover.

Greenmail

• Description: This tactic involves the target company repurchasing its shares from a potential acquirer, who quietly accumulated them through open market purchases with the sole intent of gaining a “foot in the door” stake. The buyback is executed at a premium, with the acquirer agreeing to halt any further takeover attempts. This approach helps neutralize the threat of a hostile takeover. The term “greenmail” playfully references blackmail, as the acquirer essentially coerces the target into paying a premium to fend off the unwanted takeover.
• Effect: Eliminates the immediate threat, although it can be costly and may raise concerns among other shareholders. Shareholders may worry that the company is using funds inefficiently, rewarding predatory behavior, or setting a precedent that encourages future greenmail attempts.

Lawsuits

• Description: Initiating legal action against the acquirer on grounds such as antitrust violations or breaches of fiduciary duty.
• Effect: Buys time to implement other defenses and can deter the acquirer if legal hurdles are significant.

Capital Structure Changes

• Description: Altering the company’s capital structure to make it less attractive or harder to acquire.
• Options:
  • Super-Dividend: Issuing a large dividend financed by debt, surpassing the premium offered by the acquirer. High debt levels make the company less attractive.
  • Private Placement: Issuing new shares to friendly parties, diluting the acquirer’s stake and making control more expensive.
  • Share Buybacks: Repurchasing shares from the open market to reduce the number available for the acquirer, potentially reissuing them later as employee stock options to align management with defense efforts.

Real-life Examples of Hostile Takeover Attempts

Elon Musk’s Acquisition of Twitter (2022)

Background

• Elon Musk, the CEO of Tesla and SpaceX, began acquiring shares of Twitter in early 2022, eventually becoming its largest individual shareholder with a 9.2% stake as of Feb 10, 2022.

Hostile Elements

• Direct Appeal: On Apr 14, 2022, Musk made an unsolicited offer to purchase Twitter outright for $44bn, valuing shares at $54.20 each against $37.1 as of Feb 10, 2022.
• Poison Pill Defense: On Apr 15, 2022, Twitter’s board adopted a poison pill to prevent Musk from increasing his stake beyond 15% without board approval.

Outcome

• Negotiations: Despite initial resistance, Twitter’s board entered negotiations with Musk.
• Agreement: By Apr 25, 2022, Twitter accepted Musk’s offer.
• Complications: Musk later attempted to withdraw from the deal, citing concerns over fake accounts.
• Legal Action: Twitter filed a lawsuit to enforce the agreement.
• Completion: On Oct 28, 2022, Musk completed the acquisition, taking Twitter private.

Impact

• On November 4, 2022, the company announced via email that it would begin layoffs, reducing approximately half of its 7,500-person workforce

Xerox’s Attempted Takeover of HP (2019-2020)

Background

• On Nov 5, 2019, Xerox made an unsolicited offer to acquire HP for per share consideration of $22.00, consisting of $17.00 in cash and 0.137 shares of Xerox common stock. The proposal represented a 31% premium over HP’s closing price of $16.78 that day.
• Despite being smaller in market capitalization, Xerox pursued HP to combine their printing businesses.

Hostile Elements

• Rejected Offers: HP’s board rejected Xerox’s proposals, citing undervaluation and concerns over debt levels.
• Tender Offer: On Feb 10, 2020, Xerox raised its bid to $24.00 per share and announced plans to initiate a tender offer for HP’s shares around March 2, 2020, representing a 43% premium over HP’s closing price on Nov 5, 2019.
• Proxy Fight: Xerox nominated 12 candidates to replace HP’s board members at the annual meeting.
• Poison Pill Defense: On Feb 20, 2020, HP’s board adopted a poison pill strategy to counter Xerox’s planned hostile proxy bid.

Outcome

• COVID-19 Impact: In March 2020, Xerox withdrew its tender offer due to market uncertainties caused by the pandemic.
• Abandonment: The proxy fight was also halted, ending the hostile takeover attempt.

Impact

• Demonstrated the challenges smaller companies face when attempting to acquire larger firms.
• Emphasized the role of global events in affecting M&A activities.

Broadcom’s Attempted Acquisition of Qualcomm (2017-2018)

Background

• On Nov 6, 2017, Broadcom made an unsolicited offer to acquire Qualcomm for per share consideration of $70.00, consisting of $60.00 in cash and $10.00 per share in Broadcom shares, valuing Qualcomm at $130bn. The proposal represented a 28% premium over the closing price of Qualcomm common stock on November 2, 2017.
• The bid was one of the largest in the history of the technology industry.

Hostile Elements

• Bid Rejection: On Nov 13, 2017, Qualcomm’s board unanimously rejected Broadcom’s non-binding, unsolicited proposal.
• Proxy Fight: Broadcom took steps towards a hostile takeover by collaborating with key shareholders, including Silver Lake, to nominate 11 directors to replace Qualcomm’s board. On December 22, 2017, Qualcomm formally rejected Broadcom’s director nominees, setting the stage for a proxy fight.
• On Feb 5, 2018 Broadcom increased its offer to $82 per share from the initial $70, calling it the “best and final offer.”

Outcome

• US. Government Intervention: On Mar 12, 2018, President Donald Trump blocked the takeover on national security grounds, following a recommendation from the Committee on Foreign Investment in the United States (CFIUS).
• Termination: Broadcom ceased its pursuit and relocated its headquarters from Singapore to the U.S. for two key reasons: a) to be recognized as a U.S. entity, decreasing the chances of CFIUS blocking future acquisitions, and b) to secure better access to U.S. markets and attract investment from U.S.-based institutional investors.

Impact

• Vulnerability of Non-Staggered Boards: The situation highlighted the risk associated with non-staggered boards, as Qualcomm’s board, with all 11 directors up for election, was more vulnerable to a hostile takeover.
• Concerns over Foreign Acquisitions: The deal underscored worries about foreign ownership in critical U.S. technology companies.
• Government Intervention Precedent: The decision set a significant precedent for government involvement in large M&A transactions based on national security concerns.

Conclusion

Hostile takeovers are a significant facet of the corporate world, showcasing the lengths to which companies may go to gain control over valuable assets. The aggressive tactics and robust defenses discussed not only influence individual businesses but also shape industry trends and regulatory environments. Understanding these dynamics is crucial for stakeholders to navigate the complexities of mergers and acquisitions effectively.

Additional Resources

• Investment Banking Courses
• M&A Explained
• Poison Pill Defense
• 10 Largest US & European Mergers and Acquisitions in History
• Asset Step Ups (M&A)