Hostile Takeover
Definition
A hostile takeover is an acquisition of a company against the wishes of its current management and board of directors. This type of takeover is often executed by another company or a well-financed raider. Shareholders may accept the offer if the price is sufficiently high, even if management resists and asserts that the company’s value is higher than the offered price.
Examples
- Kraft Foods and Cadbury: In 2009, Kraft Foods launched a hostile takeover of Cadbury, which was resisted by Cadbury’s management. Despite the resistance, Kraft Foods eventually succeeded.
- Sanofi-Aventis and Genzyme: In 2010, Sanofi-Aventis made an unsolicited bid for Genzyme, which was initially rejected by Genzyme’s management. After prolonged negotiations and increased offer prices, the acquisition was completed.
Frequently Asked Questions
What are common strategies used by target companies to resist a hostile takeover?
Target companies may employ various strategies to resist hostile takeovers, including:
- Poison Pill: Issuing new shares to dilute the potential acquirer’s stake.
- Greenmail: Buying back shares from the potential acquirer at a premium.
- Scorched-Earth Defense: Taking drastic steps to make the company less attractive to the acquirer.
What motivates a company or raider to pursue a hostile takeover?
A company or raider might pursue a hostile takeover for several reasons:
- Belief that the target company is undervalued.
- Desire for strategic assets or market share.
- Opportunities for synergies and cost savings.
What can shareholders consider during a hostile takeover bid?
Shareholders typically consider:
- The offered takeover price versus the current market value.
- The long-term potential and future strategy of the target company.
- Recommendations and assessments from valuation analysts and financial advisors.
Related Terms
- Friendly Takeover: An acquisition that is agreed upon by the management and board of directors of both companies.
- Greenmail: The practice of purchasing enough shares in a target company to threaten a takeover, forcing the target company to buy back shares at a premium.
- Poison Pill: A strategy used by companies to prevent or discourage hostile takeover attempts by making shares less attractive.
- Scorched-Earth Defense: Measures taken by a target company to make it less attractive to the acquiring party, often through asset sales or incurring significant liabilities.
Online References
Suggested Books for Further Studies
- “Mergers, Acquisitions, and Other Restructuring Activities” by Donald DePamphilis
- “The Art of M&A, Fifth Edition: A Merger Acquisition Buyout Guide” by Stanley Foster Reed, Alexandra Lajoux, H. Peter Nesvold
- “Takeovers: A Strategic Guide to Mergers and Acquisitions” by Thomas J. Dougherty
Fundamentals of Hostile Takeover: Corporate Finance Basics Quiz
### What is a hostile takeover in corporate finance?
- [ ] An acquisition agreed upon by both companies’ management.
- [ ] A merger of two companies of equal size.
- [x] An acquisition against the wishes of the target company's management and board.
- [ ] A joint venture between two or more companies.
> **Explanation:** A hostile takeover occurs when a company or raider attempts to acquire another company against the wishes of the target company's management and board of directors.
### Who typically votes to accept or reject a hostile takeover offer?
- [x] Shareholders
- [ ] The target company’s board of directors
- [ ] Government regulators
- [ ] The acquiring company’s employees
> **Explanation:** Shareholders ultimately decide whether to accept or reject a hostile takeover offer, often based on the offered price and potential benefits.
### What is a common strategy used to thwart hostile takeovers involving the issuance of new shares?
- [ ] Scorched-Earth Defense
- [ ] White Knight Defense
- [x] Poison Pill
- [ ] Greenmail
> **Explanation:** A poison pill involves issuing new shares to dilute the acquiring company's stake, making the takeover more difficult or costly.
### What does a "greenmail" strategy entail?
- [ ] Issuing new shares to dilute ownership.
- [ ] Taking defensive legal action.
- [ ] Merging with another company.
- [x] Buying back shares from the acquirer at a premium.
> **Explanation:** Greenmail is the practice of buying back shares from the potential acquirer at a premium to avoid the takeover.
### Which successful hostile takeover involved Kraft Foods?
- [ ] Kraft Foods and Nestlé.
- [ ] Kraft Foods and Hershey.
- [x] Kraft Foods and Cadbury.
- [ ] Kraft Foods and Mars.
> **Explanation:** In 2009, Kraft Foods launched a hostile takeover of Cadbury, successfully acquiring the company despite resistance from Cadbury’s management.
### What ultimately determines the success of a hostile takeover?
- [ ] The resistance of the target company’s management.
- [ ] The size of the acquiring company.
- [ ] The target company’s current liabilities.
- [x] The shareholders' decision.
> **Explanation:** The success of a hostile takeover is ultimately determined by the shareholders' decision to accept or reject the offer, regardless of management's resistance.
### What is the main motivation behind using a scorched-earth defense?
- [ ] Increasing the company’s profitability.
- [x] Reducing the attractiveness of the company to acquirers.
- [ ] Expanding market share.
- [ ] Enhancing employee retention.
> **Explanation:** The scorched-earth defense involves making the company less attractive to potential acquirers, often through asset sales or high liabilities, to discourage a hostile takeover.
### What type of takeover is agreed upon by management and board of directors of both companies?
- [ ] Hostile Takeover
- [x] Friendly Takeover
- [ ] Greenmail
- [ ] Poison Pill
> **Explanation:** A friendly takeover is agreed upon by the management and board of directors of both the acquiring and target companies.
### In a hostile takeover, what strategy increases the share price to deter the raider?
- [x] Greenmail
- [ ] Poison Pill
- [ ] Friendly Takeover
- [ ] Golden Parachute
> **Explanation:** Greenmail involves buying back shares from the potential acquirer at a premium, effectively increasing the share price to deter the raider.
### What did the term “white knight” refer to in a corporate defense strategy?
- [ ] A merger with another company.
- [x] Finding another more favorable company to acquire the target.
- [ ] Issuing new shares.
- [ ] Negotiating directly with the raider.
> **Explanation:** A “white knight” is another, more favorable company that the target company prefers to be acquired by, used as a defense strategy against a hostile takeover.
Thank you for exploring our article on hostile takeovers and mastering our challenging quiz! Continue to build your prowess in corporate finance and acquisition strategies.
