What Is A Hostile Takeover? Corporate Strategies Explained

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If you've been part of the binge-mania of the summer of 2023 that is Suits, you've probably heard Mike and Harvey discuss the idea of a "hostile takeover." Especially in that season where Mike inexplicably becomes an "investment banker," but we don't have to talk about that.

But while you were watching two of New York's coolest, least-likeable workaholics chat about multi-billion dollar mergers, did you ever stop to ask yourself what a "hostile takeover" actually is?

Imagine you're a kid on a playground. You spot another kid with a toy you've always wanted. Instead of asking politely, you simply try to snatch it. This act of trying to forcibly take something, in the corporate world, is known as a hostile takeover. Let's unpack this in simpler terms.

Hostile Takeover 101

At its core, a hostile takeover is when one company (the acquiring company) attempts to buy another company (the target company) without the approval or wishes of the target company's management. Think of it as the opposite of a friendly takeover, where both parties shake hands and agree. Instead, in a hostile takeover attempt, the target company's management and board of directors may strongly resist.

Tactics of a Hostile Takeover

Tender Offer: This is like offering to buy the toy on the playground for a premium price over its market price. The acquiring company reaches directly out to the shareholders of the target company with an offer price, hoping to buy enough shares to gain control.

Proxy Fight: Picture this as a popularity contest. Here, the acquiring company tries to persuade enough shareholders to replace the current board with a new board that will approve the acquisition.

Open Market Purchases: This is the straightforward route. The hostile bidder simply buys shares of the target company in the open market, hoping to get a controlling stake.

Defensive Plays

Companies aren't naive, and they're not totally defenseless in the fight against being taken over. When it comes to playing defense, the board of directors of the target company has some defensive strategies up their sleeves, like:

White Knight: This is akin to calling a friend for help in a schoolyard tussle. The target company seeks a friendlier company to counter the hostile acquirer, but the target company still ends up owned by someone else.

Poison Pill Defense: This strategy makes it prohibitively expensive or unattractive for the hostile bidder. One variant, the flip-in poison pill, allows existing shareholders (except the hostile acquirer) to buy additional shares at a discounted price.

Pac-man Defense: Turning the tables! The target company tries to buy the acquiring company, just like in the famous game.

Crown Jewel Defense: The target company sells off its most valuable assets, making it less appealing to the potential acquirer.

Real-World Hostile Takeovers

You might be thinking, "Do these happen in real life?" Absolutely!

Remember when Kraft Foods went after Cadbury? Or when Time Warner resisted media magnate Rupert Murdoch? These weren't smooth conversations over tea. They were strategic battles.

Elon Musk's Hostile Takeover of Twitter

However, the most famous recent example is the "Debacle of Silicon Valley," also known as Elon Musk's inexplicable takeover of the company formerly known as Twitter. When Musk polled his Twitter followers about free speech on the platform in April 2022, he felt moved to begin to purchase shares of the publicly traded social media platform.

A few weeks later, Musk announced that he had purchased 9.2% of the company, which led Twitter's board to adopt the aforementioned poison pill defense. If Musk acquired 15% or more of the company, the company would flood the market with new shares, essentially diluting Musk's power. Instead, Musk issued a tender offer for the company at $54.20 per share, a premium the board could not refuse. Bonus points for the thinly-veiled weed joke.

However, there's was a reason the premium was one the board couldn't refuse - it's because it was nonsense. Musk effectively offered more than double what the company was trading at. This led Musk to reportedly seek to back out of the deal, entering into protracted, and very public, negotiations around the number of automated bots on the platform. This led to a lawsuit, then a counter-suit, and even the corporate intrigue of a whistleblower and Musk text messages during legal discovery that outed him as not actually wanting to buy the company.

However, after 8 months of legal disputes, the deal was done and Musk took control of Twitter, cleaning house and immediately erasing nearly 11-figures of brand and enterprise value in the process.

Legal Guardrails and Considerations

In the United States, hostile takeovers aren't a free-for-all. The Williams Act mandates that anyone buying more than 5% of a company's stock must file with the Exchange Commission. This is like announcing to the whole school you're planning to take someone's toy, giving them time to prepare.

Furthermore, things like employee stock ownership programs, staggered boards, and shareholder rights plans are tools companies use to strengthen their positions against potential hostile bidders.

Why the Drama?

Often, a group of investors or corporate raiders see value in a company that its current management might not be capitalizing on. They believe that by gaining control, they can enhance the value. But remember, past performance doesn't guarantee future results. Investment decisions should be based on multiple factors.

Shareholders: The Power Players

In all this, remember the shareholders of the target company. Their voting power, based on the number of stock shares they hold, becomes crucial. Activist shareholders or activist investors can rally the troops, so to speak, to support or oppose a takeover bid.

Endgame

Hostile takeovers are intricate dances of strategy, corporate governance, and finance. Whether you're a shareholder, an employee, or just a casual observer, it's fascinating to see the dynamics of one company vying for control of another.

Yet, just like our playground scenario, not every attempt succeeds. Some end in a truce, with both companies going their separate ways. Some lead to a full acquisition of the target company. But in every case, it underscores the ever-changing, ever-dynamic world of business.

Final Thoughts

Like many aspects of finance and business, hostile takeovers may seem complex and daunting. But at their core, they're about belief, strategy, and value. And whether you're Team Acquirer or Team Target, it's a testament to the timeless nature of competition and strategy in the business world.