hostile-takeover

What Is A Hostile Takeover? Hostile Takeover In A Nutshell

Hostile takeovers occur when one company (the “acquirer”) seeks to purchase another company (the “target”) despite opposition to the move from the target’s management. Hostile takeovers differ from friendly takeovers, where both companies work to achieve a mutually beneficial outcome. A hostile takeover, therefore, occurs when one company attempts to seize control of another company despite objections from that company’s management.

Understanding hostile takeover

To take control of the target, the acquirer interacts with the target’s shareholders and offers to purchase their shares at a premium.

When the acquirer has purchased enough shares to receive a controlling interest, the hostile takeover is successful.

Hostile takeovers became popular in the United States during the 1980s, with 62 worth more than $50 million occurring between 1984 and 1986 alone.

Such was their prevalence that they influenced perceptions of American corporate culture.

The two types of a hostile takeover

There are two main strategies to help the acquirer complete a hostile takeover:

Tender offer

As mentioned in the previous section, an acquiring company might offer to purchase stock in the target company from shareholders at a premium to the market value.

The intention here is to obtain a controlling interest in the target by holding at least 50% or more of the voting stock.

Proxy fight

The second option to acquire the target company is by proxy vote. In this case, the acquiring company convinces shareholders in the target company to vote their management out.

With directors opposing the move ousted, the acquiring company can establish a team that approves the takeover.

Why do hostile takeovers occur?

Many hostile takeovers occur because previous friendly takeover attempts have failed for whatever reason.

In any case, most hostile takeovers occur because the acquirer wants to:

  • Increase revenue.
  • Remove a competitor from the industry.
  • Gain access to copyrighted, patented, or other proprietary technology.
  • Gain access to desirable employee skills or specializations. 
  • Control access to resources, raw materials, or specific supply chain relationships.

For shareholders in the target company, many hostile takeovers are simply driven by the lure of capital gains.

Hostile takeover examples

Examples of hostile takeovers include:

InBev and Anheuser Busch

International beverage company InBev attempted to acquire American beer company Anheuser Busch by ousting its board of directors.

When the attempt failed, InBev offered shareholders a premium price on their shares to secure the deal.

Kraft Foods and Cadbury

In 2009, Kraft made an unsuccessful $16.3 billion bid for English chocolatier Cadbury.

The bid was increased to around $19 billion the following year, which Cadbury was forced to accept after resisting the deal for months.

Shareholders in the company received a 5% premium on their holdings.

Sanofi-Aventis and Genzyme Corporation

French pharmaceutical giant Sanofi-Aventis decided to acquire American biotech company Genzyme in 2010.

The former made several friendly takeover attempts which were ultimately turned down, so the Sanofi-Aventis CEO began communicating with shareholders directly to gather support for the acquisition.

Nine months later, the deal was done.

Key takeaways:

  • A hostile takeover occurs when one company attempts to seize control of another company despite objections from that company’s management.
  • A hostile takeover usually occurs because most companies are focused on growth. Acquiring another company can increase revenue, reduce competition, and grant access to proprietary technology, skilled employees, and important supply chain relationships.
  • Instances, where a hostile takeover was facilitated by shareholders, include the acquisition of Anheuser Busch by InBev and the acquisition of Cadbury by Kraft Foods. Another example is the takeover of Genzyme by Sanofi-Aventis, where shareholders were approached directly after friendly takeover attempts failed.

Connected Business Concepts

Economies of Scale

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In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

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In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

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In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

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In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Creative Destruction

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Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

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Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Command Economy

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In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Animal Spirits

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The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

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State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

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The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

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