Hostile Takeovers vs. Friendly Takeovers:Woodridgeandscott
What's the Difference?
Companies often grow by taking over their competitors, acquiring a hot startup, or merging with the competition. Public companies need the approval of their shareholders and board of directors in order to get a deal done. However, if managers are against an acquisition, the acquiring company can still make efforts to win the deal through so- called hostile measures.
A hostile takeover is when, the acquiring corporation, takes over the target corporation, without the agreement of the target corporation’s board of directors. The target company’s directors may oppose the acquisition, in such a situation, the acquiring company can offer to pay target company shareholders for their shares in what is known as a tender offer. If enough shares are purchased, the acquiring company can then approve a merger or simply appoint its own directors and officers who run the target company as a subsidiary. Hostile attempts to take over a company typically take place when a potential acquirer makes a tender offer, or direct offer, to the shareholders of the target company. This process happens over the opposition of the target company’s management, and it
usually leads to significant tension between the target company’s management and that of the acquirer.
There are several strategies that a company can put in place to stave off a hostile takeover which includes:
- Poison pills – As the name indicates, something that’s difficult to swallow or accept. A target company may use a poison pill to make its shares unfavorable to the acquiring firm or individual. Poison pills also significantly raise the cost of acquisitions and create big disincentives to deter such attempts completely. The mechanism protects minority shareholders and avoids the change of control of company management. Implementing a poison pill may not always indicate that the company is not willing to be acquired. At times, it may be enacted to get a higher valuation or more favorable terms for the acquisition.
- Greenmail, Greenmail is money paid to an entity to stop or prevent aggressive behavior. It is an anti-takeover measure where the target company pays a premium, known as greenmail, to purchase its own shares back at inflated prices from a corporate raider. After accepting the greenmail payment, the raider generally agrees to discontinue the takeover and not buy any more shares for a specific time.
- White knight A white knight is a hostile takeover defense where a ‘friendly’ individual or company acquires the target company at fair consideration when it is on the verge of being taken over by an ‘unfriendly’ bidder or acquirer. The unfriendly bidder is generally known as the “black knight.” Although the target company does not remain independent, acquisition by a white knight is still preferred to the hostile takeover. Unlike a hostile takeover, current management typically remains in place in a white knight scenario, and investors receive better compensation for their shares.
A hostile takeover is usually accomplished by a tender offer or a proxy fight. In a tender offer, the acquiring company seeks to purchase shares from the shareholders of the target corporation at a premium to the current market price. The premium over the market price is an incentive for shareholders to sell to the acquiring company. The acquiring company tries to persuade shareholders to install new management or take other types of corporate action. The acquiring company may highlight alleged shortcomings of the target company’s management. The acquiring company seeks to have its own candidates installed on the board of directors.
A friendly takeover occurs when one corporation acquires another with both boards of directors approving the transaction. Most takeovers are friendly, but hostile takeovers and activist campaigns have become more popular lately with the risk of activist hedge funds.