Mergers and acquisitions (M&As) are a regular part of the business world—almost like routine transactions. But some deals stand out for their sheer scale and controversy. A prime example is Kraft Foods’ hostile takeover of Cadbury PLC.
This high-profile battle stretched over several months and eventually ended with Cadbury agreeing to the acquisition, led by Kraft’s then-CEO, Irene Rosenfeld.
What made this deal particularly significant was its impact on M&A regulations in the UK. The Takeover Panel, which oversees such transactions, revised the rules for foreign companies acquiring UK firms. The changes strengthened the position of target companies and required acquiring firms to be more transparent about their post-takeover plans.
So, what is a hostile takeover? How does it work, and is it even legal? Find out the answers in this detailed guide.
What is a hostile takeover?
A hostile takeover is a process in which the acquiring company either fully acquires another company or takes control of the target company without the consent of the target company’s management.
The main difference between a hostile takeover and a friendly takeover is the consent of the management of the target company.
A friendly takeover is a process in which the acquiring company makes an offer and the target company accepts the offer (maybe after negotiations). Hostile takeovers are different as the target company’s leadership is not interested in selling, so the buyers directly approach the existing shareholders for further action (discussed later in the article).
In simple terms, think of a buyer who wants to purchase a house co-owned by multiple individuals. The buyer approaches one of the owners with a purchase offer, but the owner rejects. The buyer now directly approaches the other co-owners and convinces them to sell. The buyer now has stronger and more decisive rights in the ownership of that property.
How does a hostile takeover work?
Mergers and acquisitions always come with benefits and are triggered by different objectives, and a hostile takeover is no different. Hostile takeovers often happen for the same reasons as other mergers or acquisitions. These include:
· Thinking the target company is undervalued and has more worth than the market shows
· Wanting to gain control of valuable assets such as a company’s operations or technology
· Taking action as activist investors who aim to improve how a company is run
Here are three commonly used hostile takeover strategies.
1. Tender Offer
A tender offer means the acquiring company offers to buy shares directly from the target company’s shareholders. The offered price is higher than the current market value. The main goal is to gain enough voting power to control the company. This usually means owning over 50% of the voting shares. Most tender offers only go through if the acquirer gets a minimum number of shares.
Tender offers also have an expiration date. The acquiring company might look for other strategies to gain control if the deal does not close before the offer expiration date.
2. Proxy fight
A proxy fight is a strategy in which the acquiring company tries to convince shareholders to replace the target company’s board of directors. This makes it easier for the takeover to move forward. For example,
· Company A wants to take over Company B
· Company A might ask shareholders of Company B to vote out board members who oppose the deal.
· Shareholders would then vote in new directors who support the takeover
The proxy fight strategy only succeeds if the acquiring company convinces the existing shareholders that current management is not doing a good job.
3. Buying Shares in the Market
An acquiring company may also start buying shares of the target company on the open market to build ownership quietly. The acquirer will get more influence or control over the target company by doing so.
The acquirer must publicly disclose its position after hitting a certain level of ownership in the concerned company. This often leads the target company’s board of directors to adopt defensive mechanisms to prevent the takeover.
It is important to understand that communication always plays a key role in M&As, regardless of the strategy being used. Using secure and diverse communication tools like virtual data rooms not only ensures smooth collaboration but also helps both sides keep an eye on how the transaction is progressing.
Are hostile takeovers legal?
Hostile takeovers are legal in most countries, but companies must follow strict rules set by financial and corporate authorities. Here are some examples of how the law regulates these transactions.
· The Williams Act requires anyone buying more than 5% of a company’s shares to report their plans.
· Tender offers must stay open for at least 20 business days to give shareholders time to decide.
State laws give companies the right to protect themselves using tools like poison pills. It is legal for an acquiring company to use methods such as proxy votes or public tender offers to gain control. Actions like insider trading or using threats are illegal.
Hostile takeovers happen more often in the U.S. and the U.K. They are less common or face more government oversight in places like Europe and South Asia.
How to avoid a hostile takeover?
Can companies avoid a hostile takeover? Yes, they can, and here are some common techniques:
1. Poison Pill
A poison pill is a strategy that makes the target company harder to take over. It lets current shareholders buy more shares at a lower price. This lowers the value of the shares owned by the potential buyer and makes it more expensive for them to gain control. The goal is to make the takeover so difficult or costly that the buyer gives up.
2. Staggered Board
A staggered board means that only part of the board members are up for election each year. Usually, only one-third of directors are replaced at a time. This setup makes it harder for a buyer to quickly take control of the entire board. Some investors do not like this defence because it can block takeovers that might benefit shareholders.
3. Golden Parachutes
Golden parachutes are special payouts promised to top executives if they lose their jobs after a takeover. These deals can lower the value of the company by increasing costs. This often makes the target company less attractive to buyers. The golden parachute technique reduces the price of a takeover and also helps discourage unwanted attempts.
4. Strong Shareholder Relations
Good relationships with shareholders can help stop hostile takeovers. When investors trust the leadership and support the company’s direction, they are less likely to back an outside bid. Clear goals and steady performance help build that trust.
5. Regular Valuations and Monitoring
Checking the company’s financial health and market value often helps spot threats early. A company that looks cheap or underperforming may attract takeover attempts. Improving performance and staying aware of market conditions can help keep the company in a strong position.
How to stop a hostile takeover?
It is hard to say whether a company can stop a hostile takeover or not, but it can certainly fight back. Here is how to do it.
1. White Knight Strategy
A target company may look for a more favourable buyer to counter a hostile bid. This “white knight” typically shares the target’s strategic vision and offers more agreeable terms. While it still results in a sale, the outcome better serves stakeholders and prevents the hostile bidder from gaining control.
Coordinating with the “white knight” may require frequent communication and rapid data sharing over secure channels. Companies can explore data-sharing channels like virtual data rooms to keep things private and highly secure.
2. Legal Action
Filing lawsuits is a great way to delay or at least disrupt the takeover process. Companies often challenge the acquiring company on regulatory grounds or unethical conduct. These legal moves increase uncertainty and make the acquisition riskier and costlier.
3. Share Buybacks
This is a strategy in which the target company purchases shares from existing shareholders. This repurchasing limits the number available to the acquiring company. This tactic may make the hostile offer less attractive because it can
· Shift ownership back toward friendly stakeholders
· Drive up the share price, and
· Signal strong confidence in the company’s future
4. Public Relations Campaigns
Shaping public perception plays a critical role. Companies often communicate directly with investors, employees, and the public to highlight the risks of the takeover. Emphasizing potential disruptions or misalignment helps rally support and build resistance to the hostile takeover bid.
Well-known hostile takeover examples
Apart from Kraft-Cadbury’s “fairytale”, here are some other examples of hostile takeovers.
Oracle vs. PeopleSoft
PeopleSoft announced it was merging with J.D. Edwards in 2003. However, Oracle made a surprise offer to buy PeopleSoft just a few hours later. PeopleSoft rejected the offer and tried to block the deal through legal action and customer support plans. The target company eventually gave in and accepted Oracle’s $10.3 billion offer in December 2004.
Sanofi-Aventis and Genzyme
Sanofi tried to acquire Genzyme for its rare disease treatments and strong research pipeline in 2010. The acquiring company wanted to grow in the biotech space and saw Genzyme as a key opportunity.
The target company rejected the offer, which forced Sanofi to launch a hostile takeover by appealing directly to shareholders. The pressure worked, and Sanofi acquired Genzyme for $20.1 billion nine months later. The deal included extra payments tied to the success of a key drug still in development.
Do hostile takeovers still happen?
A hostile takeover was a popular term in the 80s, 90s, and 2000s. They are less common today, but haven’t completely vanished, and Elon’s acquisition of Twitter is a classic example of modern-day hostile takeover. The good thing is that there are stricter rules and better defensive strategies, like the poison pill, to make a hostile takeover more difficult.
Frequently Asked Questions
Was Twitter a hostile takeover?
Yes, it started a hostile takeover in 2022, and the target company’s board even tried to adopt the poison pill strategy. However, the deal was closed for $44 billion after further negotiations.
Can you hostile takeover a private company?
It is more difficult to take over a private company as the owners have more control over their ownership structure. A hostile takeover is usually common in public companies as their shares are traded publicly, which allows the acquiring company to buy them with ease.
How often are hostile takeovers successful?
Hostile takeovers don’t happen as often today and usually don’t work out. Recent studies show that only around 30% of these attempts succeed. This shows how hard it is for companies to take over others that don’t want to be bought.