This is an unfriendly takeover attempt by a company or raider that is strongly resisted by the management and the board of directors of the target firm. These types of takeovers are usually bad news, affecting employee morale at the targeted firm, which can quickly turn to animosity against the acquiring firm. Grumblings like, “Did you hear they are axing a few dozen people in our finance department…” can be heard by the water cooler. While there are examples of hostile takeovers working, they are generally tougher to pull off than a friendly merger.
The acquirer then builds up a substantial stake in its target at the current stock market price. Because this is done early in the morning, the target firm usually doesn’t get informed about the purchases until it is too late, and the acquirer now has controlling interest. In the U.K., there are now restrictions on this practice.
Saturday Night Special
Takeovers are announced practically everyday, but announcing them doesn’t necessarily mean everything will go ahead as planned. In many cases the target company does not want to be taken over. What does this mean for investors? Everything! There are many strategies that management can use during M&A activity, and almost all of these strategies are aimed at affecting the value of the target’s stock in some way. Let’s take a look at some more popular ways that companies can protect themselves from a predator. These are all types of what is referred to as “shark repellent“.
This measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. Benefits written into the executives’ contracts include items such as stock options, bonuses, liberal severance pay and so on. Golden parachutes can be worth millions of dollars and can cost the acquiring firm a lot of money and therefore act as a strong deterrent to proceeding with their takeover bid.
Takeover-target companies can also use leveraged recapitalization to make themselves less attractive to the bidding firm.
The ‘flip-over’ poison pill allows stockholders to buy the acquirer’s shares at a discounted price in the event of a merger. If investors fail to take part in the poison pill by purchasing stock at the discounted price, the outstanding shares will not be diluted enough to ward off a takeover.
An extreme version of the poison pill is the “suicide pill” whereby the takeover-target company may take action that may lead to its ultimate destruction.
For more on the basics of mergers and acquisitions, please check out this entire tutorial devoted to the subject: The Basics of Mergers and Acquisitions.
the shares held by the bidder and make the takeover bid more difficult and expensive.