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Offensive and Defensive Strategies for Hostile Takeovers

A hostile takeover occurs when a business (referred to as the acquirer) buys a target company by going directly to the target company's shareholders, either by a tender offer or a proxy vote, in the context of mergers and acquisitions (M&A). In a hostile takeover, the target company's board of directors does not accept the deal, but in a friendly takeover, the target company's board of directors does. When a buyer's offer to buy a company is turned down, there is a chance the proposed takeover will become hostile.

Companies facing a hostile takeover must employ the necessary defensive tactics to avoid unwanted sales. Finance teams have the budgetary perspectives that the organization's decision-makers depend on when heading offensive and defensive efforts in these situations. Here is an in-depth look at both sides of hostile takeovers.

What is a hostile takeover of a company?

If the management or board of directors of the target company does not agree to the deal, it is known as a hostile takeover. The acquirer goes directly to the target company's shareholders to confirm the takeover due to a lack of consent and cooperation from these decision-makers.

Aggressive takeovers are motivated by a number of factors

Mergers and acquisitions are common endeavours for businesses looking to expand their operations, acquire new skills and resources, or reduce competition, as well as those facing shareholder pressure to develop the company.

Targeted businesses that refuse acquisition offers sometimes do so because they believe the bid is undervalued. Furthermore, the offer may fail to persuade them of benefits that outweigh the benefits of operating as a stand-alone company. The bidder's long-term ambitions and financial prospects are likely to be questioned by executives and boards. Companies can also be wary of investors who wish to make significant improvements to their brand name, operations, strategies, or employees, according to Investopedia.

The process of fusion or acquisition can be divided into two portions. The first section deals with the beginning of talks between the two firms (the pre-transaction process). The transaction's execution and the start of the implementation are the second sections (the post-transaction process). Both aspects of the process are influenced by a variety of factors. Macroeconomic conditions may have an effect regardless of the specific situation.

The advantages of hostile takeovers

According to the Financial Industry Regulatory Authority, hostile takeovers have the potential to raise stock values for both acquirers and targets, even if the original plan is unfavourable to the target business. Because of the target company's properties, technology, and distribution power, the acquirer may be interested in adding it to its established business.
The target company's shareholders may receive a premium over the current stock price. Although the acquirer may end up paying more for the business by making a direct offer to the shareholders against management's wishes, there have been instances where hostile takeovers have benefited both companies. In the vast majority of cases, hostile takeovers have obliterated value.

Additional advantages of purchasing a company include increased sales, increased performance, and reduced competition. When acquired businesses continue to operate, the combined sales result in higher net earnings results for both the acquirer and the acquired.

Costs of hostile takeovers

The risk of declining stock and business value, as well as the higher cost of a forced sale, are also disadvantages of acquisition. If employee redundancies result in major layoffs and culture disruptions, company morale can suffer. Leading a hostile takeover has the potential to damage an organization's image.

You hold a majority or controlling interest in a company if you own more than 500 shares. The shareholders must vote on significant decisions made by the company. You get more votes if you have more shares. You always have a majority of the votes if you own more than half of the shares.

There is a high cost involved, with the takeover price always proving to be too high. Valuation problems (see the price too high, above) Customers and vendors who are irritated, typically as a result of the disturbance. Integration issues (change management), including employee resistance.

The offensive strategies

Various tactics and methods may be used to build an aggressive competitive strategy on their own or as part of a coordinated effort. In certain cases, companies may use completely different strategies in different locations or markets. Consider how a multinational soft drink company might respond to a competitor in its developed home market and how it might react to a start-up competitor in a developing market. As a result of this heterogeneity, some complex offensive strategies will emerge, as well as the inclusion of some defensive strategies as part of an offensive effort.

When corporations aggressively seek to buy other companies in order to accelerate growth or limit competition, this is the most intense offensive strategic strategy. Since they are more likely to be completely invested or leveraged, which may be troublesome in the event of a market recession or dislocation, these companies are also viewed as higher risk than defensive firms. All offensive tactics have one thing in common: they are costly.

When it comes to hostile takeovers, buyers have two options:

Tender offer
When a buyer makes a tender offer, he or she tries to buy shares at a higher price. For example, if the current market price of the company's stock is $10, the acquirer might try to buy them for $15, a 50% premium. The buyer will be able to obtain a majority stake in the targeted business if enough shareholders agree to sell their shares.

Companies that use the tender offer approach must adhere to the rules outlined in the Williams Act. The legislation, which was enacted in 1968, requires the acquiring company to reveal the terms and intent of its bid, as well as the source of funds and proposed plans if the acquisition is effective. It also provides enough time for both the prospective buyer and the target company to present their cases, as well as deadlines for shareholders to make their decisions.

Proxy fight
Opposing stockholder groups pressure other stockholders to allow them to use their shares' proxy votes in a proxy battle. A business that makes a hostile takeover bid will use proxies to vote to approve the offer if it obtains enough. Also known as a proxy vote or proxy contest, this strategy involves persuading shareholders to support the sale. By doing so, the prospective buyer can then convince those individuals to vote for board and executive member replacements who are more likely to approve of the acquisition.

The defensive strategies
There are three possible situations in which a corporation tries to execute a hostile takeover.

In the first, the targeted company engages in ineffective defensive action, and the company is taken over. The targeted and attacking firms are combined in the second example. A scenario like this arises when the boards of directors of two firms decide to collaborate and develop a vision for a new economic system. The threatened corporation is no longer able to protect itself, and the two firms plan to merge. In the final case, a targeted corporation engages in defensive action in order to prevent a hostile takeover by persuading existing shareholders not to sell their stock. The final scenario assumes that the new board's consolidation efforts have been approved by the current shareholders, who are unable to change. By selling their shares, they will change the governing board.

The following are the most commonly used defensive strategies:

Clauses in the articles of incorporation that must be present prior to a takeover offer:
  • The board is staggered

    The board is divided into three classes in this situation. Only one of them is elected each year, preventing the immediate takeover of a corporation, even if a controlling interest is purchased.
  • Supermajority

    To confirm an acquisition by another corporation, a qualified majority vote (majority of more than 50%, e.g., 60%) is required.
  • A fair price

    This is a record requiring all companies pursuing takeovers to pay shareholders at least the “fair price” described previously. A pricing war in which a business agrees to equal or exceed a competitor's offer
  • Increasing the number of features to stay ahead of a rival.
  • Providing improved service or warranties that demonstrate superior product quality
  • Raise awareness of enhanced goods or services through increased advertising and marketing
  • Partnering with suppliers or retailers to keep rivals out or restrict their access.
  • Resisting a competitor's advance, such as when a competitor enters a company's home market by entering their own
  • The goal of an employee stock ownership program is to establish a tax-qualified scheme that gives workers a larger stake in the business. Employees are more likely to vote for management rather than a hostile buyer, according to the theory.
  • Poison pill Likely the most famous defense against hostile takeovers the poison pill policy entails act such as taking on large loans with high-interest rates that must be paid immediately in the event of a hostile takeover or giving the company's board of directors’ large severance packages in the event of a hostile takeover and personnel changes. It is known as the golden parachute.

On the basis of strategy, it is possible to observe that not every hostile takeover attempt results in the acquisition of control over the attacked company. The final effect is primarily determined by two factors: the actual legal and economic situation on the market, as well as a resisting company's defensive strategy.

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