Hostile Takeover

Definition

A hostile takeover is a corporate action in which an investor or group of investors acquire a controlling stake in a company without the consent or cooperation of the company's management. This is in contrast to a friendly takeover, where the target company's management supports the acquisition.

5 Must Know Facts For Your Next Test

1. Hostile takeovers often occur when the target company's management is perceived as underperforming or not acting in the best interests of shareholders.
2. Acquirers in a hostile takeover may use various tactics, such as a tender offer, a proxy fight, or a gradual accumulation of shares on the open market.
3. Target companies may implement defensive measures, such as a shareholder rights plan or other anti-takeover provisions, to make a hostile takeover more difficult or expensive.
4. Successful hostile takeovers can lead to significant changes in the target company's management, strategy, and operations.
5. Hostile takeovers can have significant implications for the relationship between shareholders and company management, as well as the agency issues that arise between these two groups.

Review Questions

• Explain how a hostile takeover can impact the relationship between shareholders and company management.
  • A hostile takeover can significantly disrupt the relationship between shareholders and company management. When a company is the target of a hostile takeover, the existing management may feel threatened and may not be cooperative with the acquirer's plans. This can lead to a contentious and adversarial relationship, where the management may try to defend its position and resist the takeover, even if it is not in the best interests of the shareholders. Conversely, the acquirer may seek to replace the existing management with its own team, which can further strain the relationship between shareholders and management. This can create agency issues, as the management may prioritize its own interests over those of the shareholders.
• Analyze how a shareholder rights plan (poison pill) can be used as a defensive measure against a hostile takeover and the implications for agency issues.
  • A shareholder rights plan, or poison pill, is a defensive measure that a target company can use to make a hostile takeover more difficult or expensive. By issuing additional shares or rights to existing shareholders, the plan is designed to dilute the acquirer's ownership and make the takeover prohibitively costly. This can help the target company's management maintain control and resist the hostile takeover, even if it may not be in the best interests of the shareholders. However, this can create agency issues, as the management may be more focused on preserving its own power and position rather than acting in the shareholders' best interests. Shareholders may feel that the management is using the poison pill to entrench itself, rather than considering the long-term value of the company. This can lead to a breakdown in trust and a deterioration of the relationship between shareholders and management.
• Evaluate the potential impact of a successful hostile takeover on the agency issues between shareholders and the corporate board.
  • If a hostile takeover is successful, it can have significant implications for the agency issues between shareholders and the corporate board. The acquirer may replace the existing board members with its own nominees, who may have different priorities and agendas. This can lead to a shift in the balance of power and the dynamics between the shareholders and the board. The new board may be more aligned with the acquirer's interests, which may not necessarily align with the interests of all shareholders. This can create new agency issues, as the board may be more focused on serving the acquirer's interests rather than the broader shareholder base. Additionally, the change in management and board composition can lead to uncertainty and disruption, which can further exacerbate agency issues and the relationship between shareholders and the corporate board. Ultimately, a successful hostile takeover can have far-reaching consequences for the agency issues within the organization.

Related terms

Tender Offer: A tender offer is a public offer made by an acquirer to the target company's shareholders to purchase their shares at a specified price, typically higher than the current market price.

Proxy Fight: A proxy fight is a battle for control of a company's board of directors, where the acquirer tries to replace the target company's board members with their own nominees.

Shareholder Rights Plan: Also known as a 'poison pill,' a shareholder rights plan is a defensive strategy used by a target company to make a hostile takeover more difficult or expensive.