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Overview Of Hostile Takeovers: Assessing Their Impact As A Bane Or Boon

The phrase "hostile takeover" conjures up images of corporate raiders and a sense of the 1980s, when the tactic gained initial traction. However, hostile takeovers, while rare, continue to this day.
In mergers and acquisitions (M&A),a hostile takeover is when a company (acquirer) sets its eye on another company (target) and goes on to acquire it without the agreement of the board of directors of the target company. Stated otherwise, the target company's management opposes the takeover, which is why the phrase "hostile" is used.

Usually, friendly offers made to the target company's board of directors precede hostile takeovers. Initially, the entity operates in the background to persuade management and the board members to approve the deal. Things grow hostile the instant the acquirer goes straight to the shareholders after the target company's board rejects the offer. The board of directors of the target company should ideally be consulted by any entity interested in purchasing the business.

A friendly takeover differs from a hostile takeover by the fact that the board of directors of the target company recommends that shareholders approve the transaction and votes in favour of it. A hostile takeover is a type of acquisition strategy that's frowned upon in business etiquette. In hostile takeovers, the acquiring corporation obtains and seizes control of over 50% of the voting shares that the target firm has issued. A hostile takeover can only happen to public companies. Public companies sell shares publicly and have multiple owners, which makes them susceptible to a hostile takeover.

A company may acquire another company for a number of reasons. One explanation could be that the purchaser views the target business as undervalued and anticipates long-term benefits. The acquirer's desire to work in the industry the target company is in may be another factor.

The corporation initiating the hostile takeover may be able to take over the target business if it is successful in obtaining the majority of the shares. Once in control, the purchasing business is able to alter the operations, strategy, and management of the target company. Although there is a chance that the firm initiating the hostile takeover will reduce expenses, sell off non-core assets, or boost R&D spending in an attempt to boost the company's worth, these actions could also backfire.

Types of hostile takeovers

The acquirer can force the deal in one of three primary ways:
  • Tender offers: Tender offers are usually an offer to purchase shares at a premium to their market price and only lasts for a specific time. The acquirer would need to accept the tender offer for the majority of the shares in order for the hostile takeover to succeed.
  • Proxy fight: The corporation engaged in a proxy fight attempts to influence investors to vote against the current management team and in favour of a management team that would approve the takeover.
  • Stock purchase: To gain power or control over a corporation, an organization or a group of investors may also purchase shares on the open market. But the purchases have to be disclosed after a certain ownership threshold is reached, which may cause the management of the target business to launch a hostile takeover defence.

Instances of hostile takeovers in the past

Here are some examples of notable hostile takeovers and the strategies used by companies to gain the upper hand:
  1. Kraft foods Inc. and Cadbury PLC
    The 2009 hostile takeover effort by Kraft Foods Inc. against Cadbury resulted in a contentious battle as Cadbury first rejected Kraft's offer as being too lowball and unappealing. Concerned for the future of the renowned British confectioner, the UK government was also against the acquisition. In the face of opposition, Kraft raised their bid, and in 2010 they finally bought Cadbury. But the experience led to changes in UK takeover laws, raising questions about transparency and acquisition businesses' long-term goals.
  2. L&T and Mindtree acquisition
    In 2019, Larsen and Toubro Ltd. (L&T) acquired a controlling interest in Bengaluru-based Mindtree Ltd., increasing its ownership position to 60%. After closing the deal and paying ₹4,988.82 crore for an open bid to buy a 31% share in Mindtree, L&T acquired complete control over the company's board and management. The engineering behemoth's year-long bid to acquire Mindtree came to an end when L&T bought a 20.4% stake from VG Siddhartha and related firms, capping the hostile acquisition.

Defenses Against Hostile Takeovers

The target company's management has a number of options for thwarting a hostile acquisition. They include the following:
  1. The Pac-Man Defence:The Pac-Man defence is a tactic that an organization may use to stave off a hostile takeover. In the Pac-Man defence, one hostile takeover effort is answered with another hostile takeover attempt. The company that was the initial target of the takeover effectively turns the tables on the acquiring company by attempting to purchase it in turn.
  2. Golden Parachute Defence:The term "golden parachute" describes the pay that top executives of the company receive after being let go as a result of mergers and acquisitions. There are two types of compensation: monetary and non-monetary. Terminations for any reason, excluding mergers and acquisitions, are not covered.
  3. Crown Jewels Defence:A takeover defence tactic known as the "crown jewels defence" involves the target company agreeing to sell off or give away its most valuable assets to a third party in order to make itself less of an appealing acquisition target.
  4. Poison Pill:Poison pill is a strategy used by target company to avoid hostile takeovers completely or at least slow down the acquiring process, by making it costly or unattractive.

Regulatory Oversight of Hostile Takeovers

Hostile takeover bids highlight the competing interests of governments, management, and shareholders. While the shareholders of the target company want to maximize their return on investment, target company's management may use anti-takeover clauses (ATPs) to solidify their position and safeguard their employment. In light of this, governments plays a particularly significant role in defining the rules governing hostile takeovers through takeover regulation. Government may directly intervene in corporate takeovers.

Therefore, national interests may be served by takeover legislation and direct action in hostile takeovers. Since hostile takeover offers lays emphasis on the contradiction between upholding excellent corporate governance and defending homegrown industries, governance plays a crucial role in these situations.

Even though hostile takeovers are rare in India, they are common in other countries, such the US. The hostile takeover dispute between Mindtree and L&T in 2019 brought the market for corporate control in India back into focus. A takeover attempt also activates sections of the Competition Act, 2002 (the "Act") governing combinations, in addition to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the "Takeover Regulations").

Under Indian takeover regulations, hostile acquirers must submit an open offer as soon as they obtain 25% of the voting rights, or "control." Concurrently, the Competition Commission of India (CCI) permission is required. A CCI clearance delay gives target companies time to use alternative defences and opens the door to discussion. The Competition Commission of India (Procedure In Regard To The Transaction Of Business Relating To Combinations) Regulations, 2011 (the "Combination Regulations") contain the few rules that are specifically related to hostile takeovers.

Are Hostile Takeovers Ethical?

The possible detrimental effects on several stakeholders of hostile takeovers give rise to a number of ethical considerations. Among the instances are:
  1. Workplace Well-Being: Layoffs, reorganizations, and other workplace modifications brought about by hostile takeovers may be harmful to employees' morale, job security, and overall well-being.
  2. Interests of Shareholders: The interests of the target company's shareholders could be jeopardized in a hostile takeover since they could not be given a fair opportunity to consider the benefits and risks of the deal.
  3. Corporate Culture and Principles: Conflicts between corporate cultures and ideals following a hostile takeover may be detrimental to the merged company's long-term profitability and integration.
  4. Short-Term Focus: The stability and expansion of the combined business could be jeopardized by a hostile acquisition, which prioritizes short-term financial gains over long-term value creation for stakeholders.
Companies engaged in a hostile takeover should carefully evaluate the possible effects on all stakeholders in light of these ethical issues, and they should work to ensure that decisions are made responsibly, transparently, and fairly at every stage of the process.

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