Hostile Takeover

Reviewed by Vineeth | Updated on Aug 27, 2020

Introduction

A hostile takeover is a way in which a company is acquired by another company. The company being acquired is referred to as the target company and the company purchasing the target company is called as the acquirer. A hostile takeover happens when the acquirer goes through the company’s shareholders or combating the management of the company in order to get approval for the acquisition. Hostile takeovers may be completed by either proxy fight or tender offer.

The major characteristic of hostile takeovers is that the management of the target company will not wish the acquisition deal to happen. At times, the management of the target company tries to fend against the hostile takeovers by making use of strategies that are considered controversial such as the golden parachute, the Pac-Man defence, crown-jewel defence and the poison pill.

Breaking Down Hostile Takeover

Bid for hostile takeover happens when an organisation tries to gain control over a company by not taking the consent or approval from the management of the target company. Instead of taking approval from the board of directors of the target company, the acquirer will try to gain control over the company by issuing a tender offer, come up with a proxy fight, or try to purchase the requisite number of shares of the target company in the open markets. In order to spoil the efforts of the acquirer, the management of the target company will come up with defence mechanisms and may make use of the reactive defence mechanism in order to withstand the acquisition.

Factors

There are several actors that drive a hostile takeover of a company. One such factor is that the acquirer company believes that the target company is undervalued and would be beneficial in the long run if they take over that company. Sometimes, hostile takeovers are strategic moves by investors who are activists and are in pursuit of changing the management and operations of the company.