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The target company in a hostile takeover bid typically experiences an increase in the price of its shares. A hostile takeover is when an acquiring company makes an offer to the target company’s shareholders, but the board of directors of the target company does not approve of the takeover. Concurrently, the acquirer usually engages in tactics to replace the management or board of directors at the target company.
Key Takeaways
- The target company in a hostile takeover bid typically experiences an increase in share price.
- The acquiring company makes an offer to the target company’s shareholders, enticing them with incentives to approve the takeover.
- A tender offer is a bid to purchase the stock shares of the target company at a premium to the market price of the stock.
Understanding How Hostile Takeovers Impact Shares
Hostile takeovers typically occur among publicly traded companies where the owners are shareholders represented by a board of directors. A hostile takeover can occur for a few reasons. The two companies might have failed to reach a merger agreement, or the target company decided to not go forward with the merger.
Also, a group of investors might believe the management of the company is not fully maximizing shareholder value. Also, the investors might make a case for a new management team. The acquirer can also be a company. Public companies can acquire a target company through the shareholders even if management doesn’t want the takeover.
The result is the use of hostile tactics to acquire the target company by the investors or acquiring company. The goal of the takeover by the acquirer is to achieve at least 51% ownership in the target company’s stock. The strategies used in a hostile takeover can create additional demand for shares while creating an acrimonious battle for control of the target company.
Tender Offer
Acquiring companies can use a strategy called a tender offer to purchase the shares of the target company. A tender offer is a bid to purchase the stock shares of the target company at a premium to the market price of the stock.
In other words, an acquiring company might bid $50 per share for the target company when its shares are trading at $35 per share. As a result, a tender offer can lead to a significant increase in the stock price of the target company.
The reason the acquiring company makes an offer at a premium to the current stock price is to entice the existing shareholders of the target company to sell their shares and allow the acquiring company to own the majority stake.
The tender offer is typically conditional on the acquiring company obtaining controlling interest in the target company. In other words, if the acquirer can’t entice enough shareholders to sell their shares, the bid to buy the company is withdrawn.
Proxy Vote
A proxy vote is another hostile takeover strategy whereby the acquiring company attempts to convince existing shareholders of the target company to vote out their executive management and board of directors.
The acquiring company would then replace the necessary management team and board members with people who are open to the idea of the takeover and will vote to approve it.
The most expensive takeover in history is the acquisition of Time Warner by AOL in 2020, which was valued at $165 billion.
Special Considerations
Hostile takeovers, even if unsuccessful, typically lead management to make shareholder-friendly proposals as an incentive for shareholders to reject the takeover bid.
These proposals include special dividends, dividend increases, share buybacks, and spinoffs. All of these measures drive up the price of the stock in the short term and longer term. Dividends are typically cash payments made to shareholders by the company.
Special dividends are one-time payouts to shareholders. Dividend hikes are bullish catalysts, making the stock more attractive, especially in low-rate environments.
Share buybacks create a steady bid for the stocks and reduce the supply of stock. Spinoffs are strategic decisions to divest non-core business units to create higher valuations and provide a more focused vision and business for shareholders.
It’s important to note that hostile takeovers are usually a referendum on the target company’s management. Shareholders must weigh their faith in management’s long-term vision against the potential for quick profits.
Examples of Hostile Takeovers
RJR Nabisco’s buyout is one of the largest and most controversial hostile takeovers in U.S. history. RJR Nabisco Inc. was a tobacco and food company and was eventually purchased for $25 billion by the investment firm Kohlberg Kravis Roberts & Co. in the late 1980s.
RJR managers had also presented bids in an effort to thwart the hostile takeover from Kohlberg Kravis. The initial bid from the management team began at $75 per share. Over the course of a few days of intense bidding, Kohlberg Kravis won the bid with $109 a share.
In other words, the winning bid was a 45% increase in the stock’s price from the initial $75 bid from RJR’s managers. The intense, contentious bidding war was chronicled in the book (and movie) titled “Barbarians at the Gate.”
A notable example in the 21st century was in 2020 when Nvidia attempted a hostile takeover of Arm Holdings. Nvidia is a prominent U.S. semiconductor company and Arm Holdings is a British chip designer.
Nvidia attempted to purchase Arm for $40 billion, and although Nvidia’s acquisition strategy was seen as a significant move to strengthen its position in the semiconductor industry, Arm’s board was resistant to the takeover, due to concerns about how the takeover would affect its business model and relationships with its customers.
In response, Nvidia employed tactics to appeal directly to Arm’s shareholders, encouraging them to support the acquisition despite the board’s objections. This situation intensified as regulatory scrutiny emerged, with various global authorities raising antitrust concerns. Ultimately, the deal was called off in 2022.
What Are the Main Strategies Used in a Hostile Takeover?
The primary strategies used in a hostile takeover include tender offers and proxy fights. In a tender offer, the acquiring company offers to purchase shares from the target company’s shareholders at a premium to the current market price, enticing them to sell their shares. In a proxy fight, the acquirer seeks to persuade shareholders to vote out the current board of directors and replace them with individuals who are supportive of the takeover. Both strategies seek to circumvent the target company’s management to gain control.
How Do Hostile Takeovers Impact the Company’s Stock Price?
Hostile takeovers generally lead to an increase in the target company’s stock price. When an acquirer makes a tender offer at a premium, it creates demand for the company’s shares, resulting in a rise in the stock price as shareholders recognize the opportunity for a lucrative exit. The increased stock price reflects the market’s perception of the potential value of the acquisition and can also trigger other bidders to enter the fray, further inflating the share price.
What Are the Potential Risks and Consequences of a Hostile Takeover?
Hostile takeovers can carry significant risks and consequences for both the acquiring and target companies. For the target company, there may be disruptions in operations, employee morale issues, and a potential loss of key personnel during the transition. For the acquirer, challenges include integrating the new company, managing potential backlash from the target’s employees and stakeholders, and navigating regulatory scrutiny that can arise from antitrust concerns. Additionally, unsuccessful takeover attempts can damage the acquirer’s reputation and hinder future business endeavors.
The Bottom Line
A hostile takeover occurs when an acquiring company seeks control of a target company without the approval of the target company’s board of directors, typically by appealing directly to shareholders. This process often results in an increase in the target company’s stock price, as the acquirer offers a premium for shares while employing strategies like tender offers and proxy votes to gain ownership.
The dynamics of hostile takeovers highlight the tensions between management and shareholders, as well as the regulatory complexities that can arise during the acquisition process.