“Hostile takeover” occurs when your board of directors reaches an agreement where one company ceases to exist and is acquired by the other. Once the company is purchased, all of its assets, people, intellectual property and values become part of the company that it purchased. A hostile acquisition is one in which the company does not want to be bought. How can someone buy something that is not for sale? This can happen in companies where there are a huge number of owners, such as publicly listed companies. Owners have actions that symbolize a certain degree of decision-making power. If more than 50% of the shares are controlled, the company is controlled.
Why would another company want to hostile takeover? There are several reasons but among the main ones:
1) They believe that the company can generate more profits than the price that is being paid.
2) For strategic reasons such as access to its distribution channels, customers, brands and other resources.
3) The company is worth more by pieces than it is working as a whole
There are several ways to make this acquisition:
1) A soft offer can be made where shareholders are offered more than what the market value is willing to pay for their shares.
2) They can be bought from major shareholders gradually.
3) They can convince their mass of shareholders to change their board of directors to one that would approve the acquisition.
4) If it is possible to sow discord among enough shareholders, the decisions basically stop, which in the end makes the value of the company go down and it is easier to buy.
Defenses that can be mounted against a hostile acquisition:
1) Insert the election of positions for the board of directors, this so that it cannot be changed all at once.
2) A supermajority of 80% to 90% must agree to an acquisition.
3) Dual actions is where there are actions with power and without power. Shares with power are owned by a small group of shareholders with the same vision.
4) Threats that if the acquisition is made several of the key employees leave the company. It only works if the employees are extremely valuable.
5) Sell your most important assets to another company or create another company with that asset.
6) Provision of cheap shares, is a mechanism that is activated when a single shareholder has more than a certain amount of shares, the company has the power to issue cheap shares to dilute power.
7) Poisoning, this implies the acquisition of high levels of debt to make the company less attractive.
8) The Pac Man defense the company being acquired buys shares of the company that is acquiring it.
9) The white knight who is to find another company that wants to buy.
ow do companies protect themselves from a hostile takeover?
As we promised, there is still a way for companies to protect themselves from this type of takeover.
And it does not involve threatening any real estate agents – even though the name of the main tactic maintains the dramatic tone of the story.
Poison pills (in free translation, poison pills ) is a determination that when a shareholder reaches the mark of holding 5% to 30% of the shares (depending on the company), he must make an offer throughout the organization. In other words, nothing about just becoming a controlling shareholder : it is everything or (almost) nothing.
Other mechanisms of the type are:
- Pac-man defense , which is when the target, in a twist, manages to buy the acquirer. It is as if, in the end, it was you who ended up buying your neighbor’s house.
- Golden parachute , which allows the organization’s executives to terminate their contracts, and receive high severance fines if a change of control occurs. In that case, you even sell the house, but take the furniture (and everything else that is valuable) with you.