What is a Hostile Takeover and How Does It Work

What is a Hostile Takeover and How Does It Work

A hostile acquisition is an attempt by one company to take over another company against the will of the target company’s board of directors. This article will cover everything you need to know about hostile takeovers: what they are, how they work, and what it means for individual investors.

What is a Hostile Takeover?

The takeover means the acquisition of one company by another. A hostile takeover occurs when the acquirer makes a tender offer to buy the target company’s shares without the approval of the target company’s board of directors.

A hostile takeover can also occur when the acquirer buys a significant stake in the target company and then tries to replace the target company’s management with its own. It aims to gain control of the target company.

In a hostile takeover, the bidder offers to purchase the target company’s shares at a price above the current market price.

So, we can define a hostile acquisition in this way; it is the acquisition of a company by another company against the will of the target company’s management.

A hostile takeover is also known as a hostile acquisition. This can be done in several ways, but the most common is through a buyout offer.

Hostile Takeover Example

To understand a properly, it is essential to know about the example of a hostile takeover—the best example of a hostile takeover in the case of Kraft Heinz.

Kraft Heinz is an American food company that was created by the merger of Kraft Foods and H.J. Heinz in 2015. The company is headquartered in Chicago, Illinois.

Kraft Heinz made a hostile bid to acquire Unilever for $143 billion in February 2017. Unilever is a British-Dutch transnational consumer goods company.

In 2008, the global financial crisis hit. One of the most notable hostile takeover attempts was when Kraft Foods made an unsolicited offer to buy Cadbury, the British confectionery company.

Cadbury’s management rejected Kraft’s offer, but Kraft persisted. Finally, in 2010, Kraft succeeded in taking over Cadbury after a hostile takeover battle.

Another example is Elon Mask’s attempt to take over Twitter. In 2022, Mask purchased a big part of the company’s share. Then he approached to take the company private by offering a premium price compared to the publicly traded price.

How Hostile Takeovers Work

A hostile takeover is a type of corporate acquisition in which the target company does not want to be acquired.

In a hostile takeover, the bidder makes an offer directly to the target company’s shareholders. The offer is usually in the form of a cash tender offer, meaning that shareholders are offered a particular price per share to sell their stock.

The hostile bidder usually tries to acquire a controlling stake in the target company—typically more than 50% of the outstanding shares—to gain control of the board of directors. Once the hostile bidder has a controlling stake, it can elect a new board that is more favorable to the bidder’s interests.

The new board can then take hostile actions against the previous management, such as firing the CEO, changing the company’s strategy, or selling off assets.

Types of Hostile Takeovers

There are two main types of hostile takeovers: hostile acquisitions and hostile takeovers.

1. Hostile acquisitions

Hostile acquisitions occur when a company attempts to acquire another company without the approval of the target company’s board of directors. This type of hostile takeover is often done through a tender offer. The acquiring company offers to buy up a certain amount of shares from the target company’s shareholders.

2. Hostile takeovers

On the other hand, Hostile takeovers occur when the board of directors of the target company approves the acquisition by the acquiring company. This type of hostile takeover is often done through a proxy fight. The acquiring company tries to convince the target company’s shareholders to vote in favor of the acquisition.

Both types of hostile takeovers can be done through a hostile tender offer, in which the acquiring company makes an offer to buy up a certain amount of shares from the target company’s shareholders.

Hostile Takeover vs. Friendly Takeover

A hostile takeover is when one company takes over another company against its will. On the other hand, a friendly takeover is when two companies agree to be acquired.

In a friendly takeover, the target company’s board of directors agrees to the offer from the bidder and recommends that shareholders accept it. In a hostile takeover, the target company’s board of directors rejects the offer and tries to fend off the bidder.

Friendly takeovers are usually much smoother and less disruptive than hostile takeovers since they don’t involve a fight for company control.

For example, in 2012, Yahoo! tried to fend off a hostile takeover bid from Microsoft when their friendly takeover discussion wasn’t successful.

How Companies Prevent Hostile Takeovers

There are several ways that companies can prevent hostile takeovers. One way is to have a poison pill provision in their charter.

1. Poison pill

A poison pill is a measure that makes a hostile takeover much more complex and expensive.

For example, a company might issue new shares that can only be sold to the bidder at an exorbitantly high price. This makes it much more difficult for the bidder to acquire a controlling stake in the company.

Another way companies prevent hostile takeovers is by having a staggered board.

2. Staggered board

A staggered board is a board of directors that serves for more than one year but less than the full term. This makes it more difficult for a hostile bidder to take control of the board because only a portion of the board is up for election at any given time.

What It Means for Individual Investors

Hostile takeovers can be risky for individual investors. For example, if you own shares in a company that is the target of a hostile takeover, the value of your investment may go up or down depending on how the takeover plays out.

If you own shares in a company that is bidding for another company in a hostile takeover, your investment may also be at risk. The hostile takeover might fail, and the bidder might end up losing a lot of money.

Hostile takeovers can be a complex and risky proposition, but they can also lead to big rewards for investors if the takeover is successful. So do your homework before investing in a company involved in a hostile takeover, and you could see some significant returns on your investment.

FAQ

Is a hostile takeover good?

Hostile takeovers can be a hostile process, but they can also result in positive outcomes for the companies involved. In some cases, hostile takeovers can help to shake up a company and make it more efficient. In other instances, hostile takeovers can help to prevent a company from being taken over by another company.

What are the benefits of a hostile takeover?

There are several benefits of a hostile takeover. One advantage is that a hostile takeover can increase efficiency and effectiveness at the target company. A hostile takeover can also help the acquirer company gain market share, achieve economies of scale, or expand its product line. Additionally, a hostile takeover can give the acquirer company access to new technology or other valuable assets. Finally, a hostile takeover can allow the acquirer company to enter new markets or geographic areas.

What are the risks of a hostile takeover?

There are a few risks associated with hostile takeovers. One is that the targeted company may not want to be sold and may resist the takeover attempt. This can lead to a lengthy and costly battle, which may not be successful. Additionally, even if the hostile takeover is successful, there may be significant costs associated with integrating the two companies. Finally, there is always the risk that the company being acquired will underperform expectations, leading to a loss of value for shareholders.

How can I invest in a company involved in a hostile takeover?

There are a few different ways to invest in a company involved in a hostile takeover. One way is to invest in the company that is being acquired. Another way is to invest in the company that is making the acquisition.
If you believe that the hostile takeover will succeed, then investing in the acquired company may be a good choice. This is because the acquiring company will likely pay a premium for the target company.
If you believe that the hostile takeover will not be successful, then investing in the company making the acquisition may be a better choice. However, the acquiring company may be forced to sell the target company at a discount.
Whichever way you choose to invest, it is essential to do your research to make sure that you are making a wise investment decision.
This is not intended to be investment advice. Please consult a financial advisor before making any investment decisions.

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Conclusion

A hostile takeover is when one company takes over another company against its will. Hostile takeovers can be risky for investors, but they can also lead to significant returns if the takeover is successful.

If you’re thinking of investing in a company that is the target of a hostile takeover or investing in a company that is bidding for another company in a hostile takeover, it’s essential to do your research and understand the risks before investing.