What Is a Hostile Takeover?

Definition and Examples of Hostile Takeovers

A hostile takeover occurs when a company is acquired without the consent of its leadership. In a traditional acquisition, the two companies work together to agree on a deal, and the target company’s board of directors would sign off.

But if the target company’s leadership isn’t receptive to a sale, the acquiring company would go directly to the shareholders, usually with a tender offer, or an offer to purchase shares at a premium. When they purchase enough shares to have a controlling interest in the company, the hostile takeover is successful.

A famous example of a tender offer took place in 2010 when the French biotech company Sanofi-Aventis offered to purchase the U.S. biotech company Genzyme. Genzyme’s leadership declined, and so Sanofi took its bid directly to the shareholders. The acquisition was completed in 2011.

Hostile takeovers first became popular during the 1980s. Throughout the decade, there were hundreds of unsolicited takeover attempts, and companies lived in fear of such a thing happening to them. This culture of hostile takeovers even influenced the perception of corporate America during those years.

How Hostile Takeovers Work

A company may resort to a hostile takeover if the target company’s management isn’t open to acquisition bids. There are two primary strategies a company uses to complete a hostile takeover: a tender offer and a proxy fight.

Tender Offer

A tender offer is when the hostile bidder bypasses the company’s leadership and offers to purchase shares directly from shareholders, usually for more than their current market value. Each shareholder decides for themselves whether to sell their stake in the company. The bidder’s goal is to buy enough shares to have a controlling stake in the company. Tender offers are regulated by the Securities and Exchange Commission (SEC).

Proxy Contest

A proxy fight or proxy contest is when the hostile bidder attempts to replace members of the target company’s board. The goal is to get enough members on the board who will agree to the sale.

An example of a proxy fight took place between Microsoft and Yahoo! in 2008. Microsoft had offered to purchase Yahoo!, which Yahoo!’s board rejected because it felt the offer undervalued the company. In return, Microsoft launched a proxy fight, attempting to nominate its own directors to Yahoo!’s board. The takeover was ultimately unsuccessful when Microsoft abandoned its goal of acquiring Yahoo! just a few months later.

Hostile Takeover vs. Friendly Takeover

The opposite of a hostile takeover is considered a friendly takeover, also known as a merger. In this type of acquisition, the acquiring company and target company both sign off on the deal. In the table below, we’ll lay out the similarities and differences between the two transactions.

How Companies Prevent Hostile Takeovers

Many companies have developed defensive strategies to help prevent hostile takeovers. These strategies, known as poison pills or shareholder rights plans, are designed to make the takeover more difficult, more expensive, or less attractive to the hostile bidder.

The most common type of poison pill is known as a flip-in poison pill, which is automatically triggered when a hostile bidder gains a certain percentage of shares in the target company. When triggered, this poison pill gives all shareholders except for the hostile bidder the right to purchase additional shares at a discounted price.

This move dilutes the hostile bidder’s ownership in the company by flooding the market with shares. As a result, it becomes more expensive to take over the company.

What It Means for Individual Investors

As an investor, it’s possible that you would be affected by a hostile takeover. But the exact impact is unique to each situation. First, hostile takeovers aren’t necessarily negative for shareholders. In fact, they can be positive by increasing share prices for both the target and acquiring companies. And since hostile takeovers often involve the hostile bidder buying shares at a premium, this type of transaction could be profitable for you if you sell your shares.

That being said, if you decide to hold on to your shares after the hostile takeover, there’s no way to predict the long-term effects on the company’s performance or share prices.