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A hostile takeover is a corporate acquisition attempt that goes directly to a company’s shareholders -- bypassing the management team of the company to be acquired.
Hostile takeovers occur when the acquirer is making no headway negotiating with a management team. Often the acquiring company in a hostile takeover is looking to replace the executive management team or otherwise make big changes.
Hostile takeovers can be done in three ways: a direct tender offer to shareholders, a proxy fight, and a purchase on the open market of the majority of shares. Let’s discuss each of these three methods and what they mean for investors.
Hostile takeovers are done when the management team of the company to be acquired will not come to an agreement for the acquisition. This could be because the management team either believes the stock is worth more than what is being offered or because it desires to remain independent from the acquirer.
The acquirer can be a bigger company in the same industry, an unrelated company looking to expand into a new industry, or a financial institution.
Financial institutions that look to take over an underperforming company, replace management, cut costs, and possibly sell off some assets or divisions were once called corporate raiders and are now more commonly referred to as shareholder activists.
A tender offer is an offer to all shareholders. The acquirer will offer a price more than the current stock price, which is to be paid in cash or the stock of the acquiring company. If the acquirer is able to persuade shareholders with more than half of the company’s stock to take the offer, it gains control of the company.
If the acquiring company isn’t able to pull off a tender offer, it may engage in a proxy fight. In a proxy fight, the acquirer will attempt to influence shareholders to make their proxy vote in its favor.
If the acquirer is able to get enough people elected to the board of directors through a proxy fight, it may be able to oust uncooperative management and change corporate strategy without having to purchase a majority of shares.
The final method is the toughest for acquirers. The acquirer can attempt to build up a majority holding in the company by purchasing shares on the open market over time. This method is difficult for acquirers because they must file with the SEC after purchasing 10% of the company. This warns management and allows them to defend themselves from the acquisition with a poison pill defense or other strategy.
Additionally, each marginal shareholder who sells to the acquirer on the open market will require a higher price to sell. As the price increases, outside shareholders will want to ride the upward trend. The acquirer could drive the price up so much with purchasing that the takeover is no longer worth it in terms of value.
Hostile takeovers can certainly be exciting for existing investors. If one of the companies in which you have stock is about to be taken over, make sure you read the proxy statements and understand exactly what each party is saying.
Additionally, there are investors who tag along with activists, the modern-day corporate raiders. Good activists have a strong history of unlocking value in the companies they target. Management change and refocusing can turn floundering brands into long-term success stories.
Let’s look at a few historical examples of hostile takeover attempts.
Many investors and stock market spectators were surprised when a Brazilian company, InBev (BUD +0.57%), came out of nowhere to offer $65 per share, or $46 billion, to buy Anheuser-Busch in 2008.
Anheuser-Busch executives pushed back strongly against the deal. At one point, InBev even put forth a proxy vote to fire the entire Anheuser-Busch board of directors.
In the end, Anheuser-Busch shareholders accepted a tender offer for $70 per share, and the Brazilian company was able to replace the management team with its own people.
Perhaps the most famous hostile takeover inspired the book Barbarians at the Gate. The story started with R.J. Reynolds acquiring Nabisco in 1985 for $4.9 billion to create RJR Nabisco. R.J. Reynolds was a declining cigarette manufacturer and Nabisco was a food company.
A lack of synergy between the two companies and excessive spending by the management team derailed RJR Nabisco, and private equity firm KKR (KKR +2.53%) stepped in with a buyout offer in 1988.
RJR management balked and attempted to thwart KKR by spending $1.1 billion on share buybacks to inflate the stock price. Eventually, RJR’s new CEO, Ross Johnson, formed an investment group to try to take the company private.
In the end, shareholders accepted an offer of $109 per share from KKR -- $19 per share more than its original offer.
This one is not quite a hostile takeover, but it almost became one. In what many originally thought was a joke, Tesla (TSLA -0.88%) co-founder and CEO Elon Musk offered to purchase Twitter (NASDAQ:TWTR) in the spring of 2022.
Musk claimed his management strategy would be to purge bots on the site and loosen the bands of censorship that many had claimed were too tight.
After initially pushing back on the deal and even considering using a poison pill to fend off Musk, the Twitter board of directors agreed to a sale in May 2022 for a 38% premium to the stock price.
