Hostile Takeover Bids: What They Are, Tactics, and Resurgence in 2021
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Summary:
Hostile takeover bids, a strategic maneuver in the finance landscape, involve attempts to acquire a controlling interest in a publicly-traded company without board cooperation. This article navigates the complexities, exploring tactics like tender offers and proxy fights. Additionally, it delves into the resurgence of hostile takeovers, substantiated by the 2020 COVID-19 aftermath and a record-breaking surge in global mergers and acquisitions activity in 2021.
Understanding hostile takeover bids in finance
A hostile takeover bid is a calculated move within the finance sector, where a prospective buyer endeavors to secure a controlling interest in a publicly-traded company without the consent or collaboration of the target company’s board of directors. When faced with rejection, the potential acquirer has three strategic courses: initiating a tender offer, launching a proxy fight, or purchasing company stock in the open market.
Strategic tactics employed
Typically, the initial step involves making an offer to the target company’s board of directors to acquire a controlling stake. If met with resistance, the hostile takeover bid may proceed, employing the following tactical approaches:
Tender offer: a direct approach to shareholders
A tender offer constitutes a direct appeal to shareholders, encouraging them to sell their shares to the would-be acquirer at a premium above the prevailing market price. This formal bid requires meticulous paperwork filed with the Securities and Exchange Commission (SEC), accompanied by a detailed summary of the acquirer’s plans for the target company.
Proxy fight: influencing board composition
In a proxy fight, the acquirer engages in a campaign to replace existing board members who oppose the takeover with individuals sympathetic to the acquisition. The success of a proxy fight hinges on convincing shareholders of the necessity for a change in management, ultimately influencing them to allow the potential acquirer to vote their shares by proxy in favor of the new board members.
Motives behind hostile takeover bids
Companies initiating takeover bids often harbor strategic motives within the finance realm, aiming to expand their business, eliminate rivals, or achieve a combination of both objectives. Motivations can include broadening customer bases, gaining access to new distribution channels, growing market share, or attaining a technological advantage.
Additionally, activist shareholders may instigate takeover bids with the goal of enhancing the target company’s performance and capitalizing on potential stock price appreciation.
Challenges in hostile takeover bids
Efforts to acquire a controlling share of a company through open market stock purchases pose significant challenges. Attempting to amass large quantities of a company’s stock invariably drives up its price. The risk of overpaying becomes a looming concern, as the inflated stock price may not be reflective of the target company’s performance.
Consequently, hostile bidders often resort to formal tender offers or proxy fights to achieve their objectives without succumbing to the pitfalls of open market stock purchases.
The resurgence of hostile takeovers
Contrary to initial perceptions, hostile takeovers, historically associated with the 1980s, experienced a resurgence in the aftermath of the 2020 COVID-19 crisis. This unexpected resurgence was predicted by the Harvard Law School Forum on Corporate Governance, which foresaw an increase in hostile takeovers due to market downturns rendering corporations vulnerable and attractive as targets.
Surprisingly, the forecast materialized in 2021, witnessing a record-breaking surge in global mergers and acquisitions activity. According to a PwC report, 62,000 deals totaling $5.1 trillion were disclosed globally, with 130 “megadeals” valued at over $5 billion.
Frequently asked questions
What is the primary motive behind a hostile takeover bid?
Hostile takeover bids are often initiated by companies aiming to expand their business, eliminate rivals, or achieve strategic objectives within the finance sector.
How does a proxy fight influence a hostile takeover bid?
In a proxy fight, the acquirer campaigns to replace board members opposed to the takeover with advocates of the acquisition, aiming to influence shareholder support for the change in board composition.
Are there any regulatory steps involved in making a tender offer?
Yes, a tender offer is a formal process requiring paperwork filed with the Securities and Exchange Commission (SEC), accompanied by a detailed summary of the acquirer’s plans for the target company.
Key takeaways
- Hostile takeover bids navigate the complexities of acquiring a controlling interest without board cooperation.
- Tactics include tender offers, proxy fights, and strategic open market stock purchases.
- Motives range from business expansion and rival elimination to gaining a competitive advantage.
- The resurgence of hostile takeovers in 2021 challenges prior expectations, fueled by the aftermath of the 2020 COVID-19 crisis.
- Global mergers and acquisitions activity in 2021 reached unprecedented levels, with a significant number of “megadeals.”
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