A hostile takeover bid is that type of business phenomenon that occasionally appears in the news or newspapers, and although you may not fully understand what it's about, you know it's something important or even serious. The word "hostile" itself gives it a sense of importance and dramatic value.
The hostile takeover bid, while feared, is not necessarily bad for the company, although it is often unfavorable for its owners (shareholders) and their economic interests.
But before explaining a hostile takeover bid, it’s important to introduce what a non-hostile takeover bid (the standard takeover bid) is.
What is a takeover bid?
A takeover bid is a public offer of acquisition; it occurs when a company, a group of investors, or an individual investor publicly announces that they want to buy part or all of a specific company, with specific pricing and conditions outlined in the offer. Takeover bids are a strategic tool that allow companies to expand, improve their competitive position, reduce costs, and seize growth and investment opportunities.
The bid is generally launched at a price per share higher than the current market value to encourage the target company's shareholders to sell their shares, making the offer attractive and facilitating its success. In return, shareholders have the option to accept or reject the offer as they see fit.
The offer is made public in a takeover bid to ensure transparency and provide equal opportunities to all shareholders of the target company. In most financial markets, regulations require that any attempt at a significant acquisition in a public company be publicly announced to protect minority shareholders and prevent unfair practices or insider information. This prevents only some shareholders from secretly benefiting from the purchase.
Additionally, takeover bids can significantly affect the stock price of the target company and even the bidding company. By making it public, the market reacts more evenly, adjusting the stock value based on the offer and avoiding sudden fluctuations or rumors that could destabilize the market.
The final result of an accepted takeover bid is that the bidding company gains control of the target company and can decide on its direction, aiming to maximize its investment value and align both companies' operations with its strategic goals.
Upon taking control, it replaces the management with a new one to oversee the company's strategy.
When does a takeover bid become hostile?
As mentioned, a takeover bid happens when a company, investor, or group of investors wants to buy another company to create alliances between their businesses and increase market share and profits. If the target company’s management accepts the bid, the sale takes place; if they reject it, the sale does not occur.
A takeover bid becomes hostile when the bidding company launches the offer without the consent or support of the target company’s management. This can happen when:
- The target company’s management opposes the purchase because it considers the offer inadequate or not beneficial for the company or its shareholders.
- The target company disagrees with the integration or change plans the bidding company intends to implement.
In a hostile takeover bid, the bidding company goes directly to the shareholders, attempting to buy enough shares to take control, even though the target company’s management is opposed.
When it obtains enough shares to take control (more than 51%), it dismisses the board of directors and replaces it with one aligned with its vision to lead the intended changes.
Is a hostile takeover bid legal?
Yes, a hostile takeover bid is legal. Although it’s a process that happens without the consent of the target company’s management, it is conducted within a strict regulatory framework that protects both shareholders and the parties involved. In financial markets, clear rules ensure that takeover bids, including hostile ones, are carried out transparently and fairly.
These regulations include the obligation to publicly disclose the offer, disclose the terms and conditions, and comply with antitrust laws, among other aspects. This ensures that, even if it is a non-consensual operation from the management’s perspective, shareholders have sufficient information to decide whether to sell their shares or not.
Does this mean that any company can come and buy your company by force?
No, as shareholders always have the final control over whether they want to sell their shares. A hostile takeover bid is a process to bypass negotiations with the board of directors, which decides on behalf of all shareholders to reject the offer, seeking to directly buy each shareholder's portion.
When a company goes public, the benefits for the company are very significant, as selling part of the company to various shareholders provides substantial economic gains that can be used for growth and generating more profits. However, at the same time, you also lose control over the portion you sell, so if the part you sell exceeds 51%, you risk becoming a target for a hostile takeover bid that could strip you of control of the company.
Famous hostile takeovers in history
- 2003. Oracle, a software company, launched a hostile takeover bid against PeopleSoft, a competitor in the enterprise software market. Despite intense opposition and multiple defensive tactics from PeopleSoft, Oracle eventually persuaded the shareholders and completed the acquisition for $10.3 billion.
- 2008. Belgian-Brazilian brewer InBev launched a hostile takeover bid to acquire American brewer Anheuser-Busch, maker of Budweiser. After months of resistance and negotiations, Anheuser-Busch eventually accepted the offer for $52 billion, creating what is now AB InBev, the world's largest brewer.
- 2010. Kraft Foods, an American food company, launched a hostile takeover bid to acquire the British company Cadbury, famous for its chocolates. Despite initial opposition from Cadbury’s management and resistance in the UK, Kraft succeeded in persuading Cadbury shareholders with an improved offer, acquiring the company for $19.6 billion.
- 2017. Disney's takeover bid for Fox, which began as a friendly interest, turned hostile when competitor Comcast launched a counteroffer. This forced Disney to improve its initial offer, ultimately acquiring most of Fox’s assets for $71.3 billion, strengthening its position in the entertainment and streaming industry.
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