Posted by Key Takeaways
A hostile takeover is an acquisition activity carried out by the acquirer without notifying the target company’s board of directors or obtaining their consent.
There are three common ways to accomplish a hostile takeover: open market buying, tender offers, and proxy fights.
Hostile takeovers usually lead to anti-takeover measures, two of which are unequal voting rights and poison pill plans.
Hostile Takeover
A hostile takeover is an acquisition activity carried out by the acquirer without informing the target company’s board of directors or without their consent. The strong confrontation between the two parties is its basic characteristic.
Unless the target company’s stock has high liquidity and can be easily absorbed into the market. A hostile takeover is generally difficult to succeed.
Generally, some preparatory work will be done before conducting a hostile takeover. This is mainly to establish an initial point in the market for launching the takeover. That is, to first buy the target company’s shares in the market until the equity ratio of the target company reaches the requirements of the initial announcement.
The advantage of this is that the purchase is unknown and the purchase price is relatively low. Which can reduce the acquisition cost. Another advantage is that the acquirer has become a shareholder of the target company before entering into a public hostile takeover.
There are three common ways to accomplish a hostile takeover:
Open market purchase
The acquirer directly buys the target company’s shares in the open market until the target company’s equity share reaches the level of a controlling shareholder. A hostile takeover through open market purchases requires that the target company has enough outstanding shares in the market. And that the target company’s equity is relatively dispersed.
Tender Offer
A tender offer is a method of acquiring the target company’s shares in accordance with the acquisition conditions, acquisition price, acquisition period and other matters stipulated in the acquisition offer announced in accordance with the law.
Proxy battle
A proxy fight refers to a situation where one or a group of shareholders obtain control of a company through the proxy mechanism of the company’s voting rights. In the USA, this practice is also called a proxy acquisition. That the acquirer works with other shareholders of the company (such as mutual funds and pension funds) and small shareholders to obtain their support. Obtains relative or absolute control of the company’s voting rights on the basis of these funds and small shareholders entrusting their voting rights to the acquirer, thereby striving to get the acquisition case voted through.
Measures to deal with hostile takeovers
Hostile takeovers usually lead to counter-takeovers. Counter-takeovers are aimed at resisting the acquirer’s takeover behavior, maintaining the target company’s original interests, and obstructing the acquirer from achieving its acquisition goals. The following are two ways for companies to resist hostile takeovers:
Different voting rights for the same shares
A company will issue at least two types of shares: common shares and privileged shares. The reason for this is that identical shares will have varying voting rights. Privileged shares have more voting rights and are issued to the company’s board of directors or management. Different voting rights for the same shares help companies raise funds through the secondary market while the voting rights of the board of directors are not diluted too much, making it difficult for external acquirers to bypass the board of directors’ consent and conduct hostile takeovers.
Poison Pill
The poison pill was invented by Martin Lipton, a famous American mergers and acquisitions lawyer, in 1982. Its official name is “equity dilution anti-takeover measure”. It is an anti-takeover measure that increases the cost of mergers and acquisitions and causes the attractiveness of the target company to decrease rapidly.
When a company encounters a hostile takeover, especially when the acquirer holds 10% to 20% of the shares, the company will issue a large number of new shares at a low price or increase debt in order to maintain its controlling rights. Generally speaking, the “poison pill plan” is to issue new shares, but it is not always the case. In fact, there are many measures in the “poison pill plan”, including:
1. Pop the poison pill
The “pop-up” plan is a common measure that dilutes the acquirer’s equity share and voting rights by issuing new preferred shares to old shareholders other than the acquirer. Which greatly increases the acquirer’s costs. For example, preferred shares purchased at $100 can be converted into $200 worth of target company stock. The impact of the “pop-up” plan is to increase the minimum price that shareholders are willing to accept in a merger and acquisition. If the target company’s stock price is $50, then shareholders will not accept a takeover offer below $150.
2. “Pop in” poison pill
The “pop-in” plan is the opposite of the “pop-up” plan. The target company repurchases its issued stock options at a very high premium, usually as high as 100%. That is, 100 of the preferred shares are repurchased at 200. But the hostile acquirer or the major shareholder who triggered this event is not included in the repurchase. Which dilutes the acquirer’s interests in the target company.
3. Debt poison pill
The target company increases its own debts significantly, reducing the attractiveness of being acquired. The debt poison pill plan is mainly implemented through the “poison pill clause” set by the company when issuing bonds or borrowing. Once the company is acquired, the creditors have the right to demand early redemption of bonds. And repayment of loans or conversion of bonds into stocks.
4. Executive poison pill
The executive poison pill plan refers to an agreement signed by most of the company’s senior managers. If the company is acquired at an unfair price, all managers will resign collectively if one of them is demoted or fired. The stronger and more capable the company’s management team is, the more effective the implementation of this strategy will be.
The poison pill plan is a powerful anti-takeover countermeasure for hostile takeovers. It is also a relatively “toxic” anti-takeover strategy. Although it can largely prevent takeovers. It will also damage the vitality of the target company and worsen the current operating situation. Destroy the company’s development prospects and harm the interests of shareholders. Therefore, it is often opposed by shareholders and leads to legal disputes.