Beware of Hostile Takeovers—And Know How to Spot Them

A hostile takeover of a company happens when some entity tries to buy it and take control without the consent of the company’s board or management.

You may not realize it, but you’ve likely heard of some recent hostile takeovers. There have been some famous cases in the news such as when AOL bought Time Warner, Sanofi took over Genzyme, or Vodafone took over Mannesman AG. First, let’s review what makes a company susceptible to this sort of takeover in the first place.

What makes a company a hostile takeover target

Unfortunately (or fortunately, depending on how you look at it) the conditions that make a company vulnerable to a hostile takeover are fairly simple. If another entity sets its sights on buying the company and the board of the company is opposed to it, you’ve got the stage set for a potential hostile takeover.

The factors that leave a company vulnerable to a hostile takeover might be a bit nuanced; in fact, sometimes the board doesn’t even realize a hostile takeover is about to happen until it’s too late. If a company seems to be very undervalued, it might be a target; this target becomes more attractive depending on how interested the hostile party is in acquiring the company’s brand or technology.

A company may also be more vulnerable to a hostile takeover if its operations are in contention with industry best practices or some social justice cause. In such cases, so-called activist investors may take over the company to try to change its operations.

Stopping a Hostile Takeover

The poison pill approach is the most common way to defend from being taken over. “Poison pill” defense comes in two different flavors: flip-in and flip-out. The former is more common, where shareholders can buy newly-issued stock at a discounted price once a single shareholder reaches a certain volume of shares owned. A flip-over is when shareholders buy the shares of the acquiring group, diluting their equity and therefore their say.

Another way to stop a hostile takeover is to prevent one in the first place. The best method for stopping a hostile takeover is to issue stocks with differential voting rights, or DVR. With DVR stock, having fewer voting rights could mean shareholders get paid a higher dividend. This makes the stocks all the more alluring to investors and discourages their sale. In this way, a hostile takeover may be heavily discouraged. Similarly, setting up an employee stock ownership program, or ESOP, might help because employees will own a significant share of the company and be more likely to side with the existing leaders than allow for a coup.

The perfect recipe for a hostile takeover

Takeovers are likely to be hostile whenever the acquiring company is at odds with the existing company leadership or board. If there are shareholders that the acquiring company can buy out in what is known as a “tender offer.” To be clear: this offer hardly feels tender since it ends up increasing the tension between company directors and the acquiring company. Once the acquiring company is able to purchase enough shares, it can approve the merger or even approve its own board, effectively taking over.

Examples of hostile takeovers

We already opened by mentioning the attempted Time Warner coup by AOL. Time Warner actually denies that it ever got hostile. Led by Gordon Crawford, AOL was posturing as though it were going to make a hostile takeover—until Time Warner agreed to sit down and talk. Sometimes, the threat alone of a hostile takeover is enough to move deals in the right direction for both the acquirer and the acquired.

Another famous one was when InBev tried to buy Anheuser-Busch for $65 per share, with a target valuation was $46 billion. The hostile takeover quickly turned litigious, and even pitted members of the Busch family against each other. It was not until InBev upped its valuation to $70 per share, or $52 billion total, that the takeover ended; shareholders went along with this and InBev took over.

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