Hostile Takeovers

Mergers, acquisitions and takeovers are all very similar tools often used to grow a company. Google is one of the biggest tech conglomerates on the face of this planet, but how did this company grow to such a massive magnitude? A good portion of this growth has been organic, but not just that, acquisitions have been a significant strategic driver of their growth as well.

An acquisition involves two parties- the ‘acquirer’ and the ‘target’, whereby the acquirer wishes to obtain a controlling interest. Publicly traded companies need the approval of their shareholders and the board to allow the acquisition.

Dive into Hostile Takeovers:

These takeovers can still be carried out against the will of the managers of the target company, in that case, the takeover becomes hostile. If the deal is mutual between the target and the acquirer and when the consensus is that the transaction is beneficial, then the takeover is deemed friendly. A saga of poison pills, crown jewels, and proxy fights make the tale of a hostile takeover no less exciting than a suspenseful, drama-filled Netflix show. We will discuss all of that in this blog, so buckle up!

Weapons Used To Take Over:

Hostile takeovers have been accepted as a phenomenon in the world of corporate affairs, so what instruments are actually used to carry out a hostile takeover? Well, there are 2 ways:

Tender Offers: The acquirer makes an open offer to the shareholders of a company offering to buy the shares from them at a price that is higher than the market value of the stock within a stipulated time frame to drive or incentivize the shareholders into selling their stock in order to obtain a controlling stake. Let’s take an example, say Company A has stocks with a current market price of Rs. 100/share. A potential acquirer issues a tender offer of Rs. 130/share, contingent on getting 51% of the shares. These are often referred to as takeover bids.    

Proxy Fights: In a proxy fight, the acquirer tries to persuade the shareholders of the target company to use their voting power in order to use their proxies to vote out people at managerial positions so that new management can be voted in to favour the desires of the acquirer. This could be done by showing the inadequacy or incapacity of the existing management to convince the shareholders.

Defenses Against Takeovers:

So, let’s say you are a manager at a company that is a target for a hostile takeover, can you do nothing to prevent that? Of course, you can defend the company using some powerful measures, controversial, yes, but powerful. Here are some common defenses-

Poison Pill: A poison pill is a common tactic employed by the target corporation to prevent a hostile takeover. The goal to use this is to make the target company undesirable, often by increasing the cost of the acquisition significantly. The general idea is to make the shares less attractive by allowing shareholders to purchase stock at a discounted price, thus diluting the equity per share. This also forces the potential acquirers to buy more shares, thereby increasing the overall cost of the acquisition.

Crown Jewel Defense: A crown jewel as the name suggests is the most prized and desired asset of a company and could be the sole reason for attracting the takeover. This defense involves selling the crown jewels of a company in case of a takeover, often killing the purpose of the takeover.

Pac Man Defense: Now, this is an interesting one- Pac Man, the target company, attempts to eat the ghost, the acquirer, by trying to purchase controlling stock in the company that is trying to carry out the hostile takeover. This is often costly for the target company but is often effective as the acquirer would like to save their own business before they move forward.

There are several other defenses like a golden parachute, greenmail, and shark repellant, only to name a few. These are multiple routes that can be taken to save the company. The strategy chosen depends on multiple things, including the financial position of the companies, the incentive to attempt the hostile takeover and the company’s bylaws.

Hostile Takeovers in India and Why There Have Been Only A Handful of Takeover Attempts:

L&T’s acquisition of IT company Mindtree on 27th June 2019 is one of the most recent hostile takeover attempts in India which was successful. Mergers and acquisitions have been rising in India but hostile takeovers have been very scanty, part of which is due to government regulations like the Industrial Development and Regulation Act 1951, MRTP Act and FERA Act. Takeovers are generally governed by SEBI in India in accordance with the ‘Takeover code’. These measures are not significantly stringent.

Whether the practice of hostile takeovers is good or bad depends on what you think (and also, in the case of the active parties, if they are the acquirers or the targets). Regardless of the discussion, it is safe to assume that this practice will continue in the future too.

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