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Hostile Takeover

A hostile takeover refers to a type of acquisition which involves a buying company and a takeover target. Technically there is no strict difference between the concepts of friendly acquisition and hostile takeover. Yet the connotation is vastly different between the two. When the word takeover becomes used, it generally means that the target company is not a willing participant or is actively resisting. The target may oppose being bought out for a number of reasons. These could range from corporate tradition and pride to feeling an offer does not value them highly enough. Other companies will simply state they see more opportunities as an independent ongoing concern.

This contrasts with the idea of a friendly acquisition. In these more amicable types of corporate combinations, the two companies will be willing to mutually merge together. In a number of cases this will create a third company that is neither the buyer nor the target firm. It is more likely to occur in this manner when the two companies are similar in size.

Sometimes acquisitions start our friendly but turn into hostile takeovers quickly. A firm may demonstrate its clear interest in being purchased, or it may reject the idea either initially or after the fact. In these cases where they resist, the purchasing firm will be forced to aggressively buy huge stock share purchases in the target firm in order to gain a controlling majority. Only with a majority shareholder stake will such an acquisition actually occur under such circumstances.

How does a buying firm acquire such a controlling stake in a company that refuses to go along willingly with the hostile takeover in the first place? There are several ways in which they may proceed. The buying firm might propose a tender offer for present shareholders to sell them their stock share stakes. To persuade them to part with the shares, they would likely offer a significant premium over the then-current share price on the market. They would have to file a 30 day acquisition notice with the appropriate regulatory body the SEC Securities and Exchange Commission and also provide a copy to the target firm’s hostile board of directors in order to complete such an offer.

In other cases, they might simply acquire shares of the target stock quietly on the open exchange, often through an intermediary brokerage partner. It is difficult to successfully obtain 51 percent of the stock this way though, as invariably the larger shareholders who may be institutional in nature will simply not be selling on the market, even as the price rises while the activity is taking place.

Companies can defend against hostile takeovers as well. Sometimes they are successful in this. There are a variety of defenses that have been effectively employed by target firms. The most potent of these are called poison pills. Companies can assume enormous amounts of corporate debt and then spend it in an effort to make the company more expensive and less attractive. The problem with this is that it can cause a firm serious financial repercussions later. Target companies have become bankrupt as a result of such actions, then liquidated and ultimately dissolved. There are unusual scenarios where companies elect to go bankrupt instead of being acquired. In such a defense called a Jonestown Defense, they deliberately take on so much debt that they become bankrupt.

A less extreme measure that is still a type of poison pill is called a Flip-in. This much more common variety of defenses against a hostile takeover permits present shareholders to purchase additional corporate treasury stock for a substantial discount when takeover offers occur. Such provisions are many times automatically triggered if a given single shareholder acquires anywhere in the 20 to 40 percent range of the common stock. The additional inexpensive shares dilutes the ownership pool of the company so that it is harder to acquire a majority controlling interest. It also decreases the value of the stake the prospective buying company has paid for already.

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