What is a Hostile Takeover and Can it Ever Be Effective? (2022)

What is a Hostile Takeover and Can it Ever Be Effective? (1)

  • How Common Are Hostile Takeovers?
  • But Are Hostile Takeovers Effective?
  • Hostile Takeover Strategies
  • Hostile Takeover Defense Strategies
  • The Last Word on Hostile Takeovers

In this article, we define a hostile takeover, the tactics that an acquiring company may use, and the tactics that the target company may use to defend itself

A hostile takeover is the acquisition of one company (the target) by another person or corporation (the acquirer) that is done against the wishes of the targeted company. The lack of consent is why this transaction is defined as “hostile.”

An example of this occurred in 2022 when billionaire Elon Musk made an offer to buy Twitter (NYSE: TWTR) for a price that was significantly higher than its current value. In Musk’s case, the offer was approved by the board of directors. However, Twitter initially considered taking defensive steps to block the sale.

How Common Are Hostile Takeovers?

Hostile takeovers have been around for decades. However, they became part of the investment lexicon in the 1980s. This was a time when mergers and acquisition (M&A) activity was popularized infamously by the movie Wall Street. In fact, according to a 2020 article from Harvard Law, there were 160 unsolicited takeover bids in 1988. However, in recent decades, hostile takeovers have become less common. By 2019, the same article says there were only 15 hostile takeover bids.

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That being said, hostile takeovers are still a significant part of M&A activity. In 2017, hostile takeovers accounted for approximately 15% of total M&A volume.

But Are Hostile Takeovers Effective?

Recent data is hard to find. However, it appears that they are only successful about half of the time at best. In 2002 CNET reported that in the six years between 1997 and 2002, the target company mounted a successful defense in 30% to 40% of the 200 attempts. And in another 20% to 30% of the takeover attempts, the company agreed to be acquired by a “white knight” company.

Hostile Takeover Strategies

  • Proxy Fight - A proxy is an agent who is legally authorized to act on behalf of another party. A proxy vote is also a mechanism that allows an investor to vote without being physically present at a shareholder meeting. However the proxy is obligated to vote in the way the shareholder desires.

    In this strategy, the assumption is that the acquiring company has some supporters among the shareholders. This leaves the two opposing camps trying to convince the other group to allow them to use their proxy votes. For this strategy to work, the acquirer will have to acquire enough proxy votes (usually a simple majority) that will allow them to vote for the takeover.

  • Tender Offer - This is a strategy in which the acquirer will make an offer to purchase all the shares of another company at a premium above the current market value (CMV). Frequently, if the acquiring company’s initial offer is rejected by the target company’s board of directors, they may approach individual shareholders directly and ask them to sell their shares for a specific price. In the Twitter example given above, Elon Musk alluded to making a tender offer if the board of directors did not approve his “friendly” bid.
  • Acquire Controlling Interest Through Stock Acquisition – This is a fairly straightforward option in which the acquiring company will attempt to buy the amount of stock in the open market that would give them controlling interest in the company. However, there are usually mechanisms in place that prevent any single shareholder from gaining too much control of a company’s stock.

Hostile Takeover Defense Strategies

Not every hostile takeover bid is successful. There are several strategies the target company can take to fend off a hostile takeover bid. Here’s a list of the most common strategies with a description of each:

  • Differential Voting Rights (DVRs) – With differential voting rights, select shares carry more voting power than other shares. This creates a condition in which it’s very difficult for the acquiring company to generate enough votes to complete the takeover. To make the shares with less voting power more attractive, they will typically pay a higher dividend than the other shares. For this strategy to be effective, it must be established prior to the hostile takeover offer.
  • Employee Stock Ownership Program (ESOP) – When a company has an ESOP, employees of the company own a substantial interest in the company. This may align employee interests with those of management. As in the case of differential voting rights, if an ESOP is not in place until after the hostile takeover is initiated it may be invalidated by the courts.
  • Crown Jewel – This is considered one of the options of last resort. However, in this defense the company adopts a provision in its bylaws that requires the sale of the company’s most valuable assets if there is a hostile takeover. The theory is that by selling off the most valuable parts of the company, the acquirer will lose interest.
  • Poison Pill – Perhaps the most common defense is the poison pill defense. This is when existing shareholders are allowed to buy newly issued stock at a discount if one shareholder (usually the acquiring company) has bought more than a stipulated percentage of the stock. However, the buyer who triggered the poison pill to be implemented is excluded from buying discounted shares.

    Whenever a company issues new shares it has a dilutive effect of the remaining shares which may make the company less attractive to the acquirer.

The Last Word on Hostile Takeovers

Hostile takeovers are not as common today as they were in the M&A boom of the 1980s. And in recent years, the elevated valuations of many companies made the idea of a hostile takeover prohibitive.

However, as the 2022 Twitter example shows, hostile takeovers still take place for a variety of reasons. And if a company is caught unaware, they will have fewer options available to defend itself from a hostile takeover.

7 Cash Rich Stocks That Offer Safety in Any Market

Many investors are familiar with the idiom that “cash is king." It's typically a rallying cry for bearish investors when equity markets are in a downturn. The idea is that when stocks are down, cash is a safe place to park your capital until better days arrive.

The purpose of this presentation isn't to refute this timeless advice, but rather to help you think about it in a different way. We frequently remind investors that there's money to be made in any market. But when equities are falling, it requires investors to sharpen their focus. And cash plays a role.

Specifically, investors should look for companies that have a strong balance sheet that includes access to a lot of cash. Not only does this mean that these companies can manage their debt, but it also means that they can use that cash to add shareholder value either through stock buybacks or, preferably for income investors, a healthy and growing dividend.

With that in mind, here are seven cash rich stocks that offer investors a level of safety in any market.

View the Stocks Here .

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