Understanding a Hostile Takeover: Target, Acquirer, and Board of Directors
The Gautam Adani-led Adani Group declared last month that it had acquired a 29.18% stake in NDTV and would soon begin an open offer to purchase an additional 26%. However, the owners of NDTV have claimed that it was carried out against their will. The acquisition has reignited the conversation about hostile takeovers. Some claim that this acquisition is an illustration of a hostile takeover, but others don’t agree. Let’s know what a hostile takeover is.
What is a hostile takeover?
When the board of directors of the target company in an acquisition rejects an acquisition offer, but the acquiring company persists in its takeover attempt, this is known as a hostile takeover. Only publicly traded companies can experience hostile takeovers. Acquisitions are typically motivated by profit. The acquiring company derives some sort of financial gain from purchasing the target business, whether it be from a particular production technique or a particular product that they produce.
If one company perceives another as a potential rival, it may also attempt a takeover. Acquisitions can also take place when a single investor or group of investors notices a problem with the business and wants to make a change. Due to their lack of financial incentive, these acquisitions may be more difficult to prevent.
Why does a company initiate a hostile takeover?
A company may acquire another business for a number of different reasons.
- the buyer believes the target company is undervalued and anticipates long-term gains from this perception.
- Another factor can be the acquirer’s desire to enter the industry in which the target company operates.
Which Hostile Takeovers Have Occurred in The Past?
The 2009 acquisition of Cadbury by Kraft Foods ranks among the most well-known hostile takeovers. Irene Rosenfeld, CEO of Kraft Foods, declared her intent to purchase Cadbury in September 2009. For the deal, it provided a bid of $16.3 billion. Roger Carr, the CEO of Cadbury, declined the proposal. Carr hired a defence team against a hostile takeover. The UK government disagreed with the proposal and insisted that the British firm be treated with respect.
In 2010 again Kraft made an offer for the transaction of $19.6 billion. In the end, Cadbury gave in, and the acquisition was completed in March 2010. After Rajan Pillai was ousted hostilely, textile magnate Nusli Wadia assumed control of Britannia as its Chairman in 1993. Through Danone, Pillai had control of the Britannia stake. Wadia forced Danone to change sides and eventually owned 38% of the company, replacing Pillai as the company’s leader. In the past, there have been a few hostile takeovers in India. Examples include the purchase of Raasi Cements by India Cements in 1998, the purchase of Zandu by Emami in 2008, and the purchase of Mindtree Limited by Larsen & Toubro through VG Siddhartha of Cafe Coffee Day.
How Do Hostile Takeovers Work?
An acquirer has two primary options for a successful takeover when the target company’s board of directors objects: it can either target other shareholders in a proxy fight or the board of directors directly in a tender offer.
Tender offer: When an acquirer pursues the target company’s other shareholders, that is referred to as a third-party tender offer. In an effort to gain the majority ownership at 51%, the acquirer offers to pay shareholders for their stocks in the target company at a premium price. These typically only impact shareholders who own a minimal portion of the total stock of the company.
Proxy battle: An acquiring company may also attempt to oust the target company’s board of directors, which rejected the takeover. The shareholders elect these officials; the more shares you own, the more votes you have. If enough votes are cast for their candidates, an acquiring company can unseat the board of directors. This is typically accomplished by acquirers asking other shareholders for votes.
Defences against a Hostile Takeover
A hostile takeover can be thwarted by the target company’s management by using a number of strategies. Some of them are as follows:
Poison Pill: Making it possible for current shareholders to buy new shares at a discount makes the target company’s stock less appealing, which is the poison pill. As a result, the number of shares the acquiring company must purchase in order to acquire a controlling interest will rise, diluting the equity interest represented by each share. The idea behind this strategy is to force the would-be acquirer to give up on their takeover attempt by making the acquisition more challenging and expensive.
Crown jewel defence: If a hostile takeover attempt occurs, the company sells its most valuable assets and the process is called Crown jewel defence. Evidently, this deters a hostile takeover and lowers the appeal of the target company.
Amending with a supermajority: a modification to the company’s charter that calls for the approval of a merger by a clear majority of the company’s shares (67% to 90%).
A golden parachute: An employment agreement that mandates key management will receive exorbitant benefits if they are fired after a takeover. Again, the goal is to make the purchase prohibitively expensive.
Greenmail: When the acquirer has already purchased shares from the target company, the target company repurchases those shares at a higher price to keep them out of the acquirer’s possession. As an illustration, Company A pays a premium of $15 for the shares of Company B, and Company B, the target, then offers to buy back those shares at $20 each. It’s hoped that it can buy back enough shares to prevent Company A from acquiring a controlling stake.
Pac-Man defence: A Pac-Man defence is when the target company invests in the acquiring company’s stock and tries to take over the target company themselves. If the acquirer feels it is in danger of losing control of its own business, it will give up on the takeover effort. Obviously, for this strategy to work, Company B needs to have a lot of cash in hand to purchase a sizable number of Company A shares. For a small business with limited capital resources, the Pac-Man defence is therefore typically ineffective.
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