Who Benefits from a Hostile Takeover?

This can be risky, since incurring so much debt can seriously harm the value of the acquiring company. Although it was popular in the late 1970s and 1980s, the current economic climate is not friendly to the LBO. In a corporate raid, a company purchases another through a hostile takeover (often with an LBO) because their assets are worth more than the value of the company. If the target company doesn’t turn enough of a profit to balance the debt, the acquisition can be disastrous.

One of the more common defenses is the poison pill. The crown jewels defense – Sometimes a specific aspect of a company is particularly valuable. This division is the company’s “crown jewels.” It might respond to a hostile bid by selling off the R&D division to another company, or spinning it off into a separate corporation. This only works if the employees themselves are highly valuable and vital to the company’s success. For example, a telecommunications company might have a highly-regarded research and development (R&D) division. The people pill – High-level managers and other employees threaten that they will all leave the company if it is acquired.

Conversely, the acquiring company often incurs debt to make their bid, or pays well above market value for the target company’s stocks. Some analysts feel that hostile takeovers have an overall harmful effect on the economy, in part because they often fail. When one company takes over another, management may not understand the technology, the business model or the working environment of the new company. This drops the value of the bidder, usually resulting in lower share values for stockholders of that company.

How can someone buy something that’s not for sale? A stock confers a share of ownership in the company that issued it. That is, they have issued stock that can be bought and sold on public stock markets. If you own more than 500 shares, you own a majority or controlling interest in that company. Hostile takeovers only work with publicly traded companies. If a company issued 1,000 shares, and you own 100 of them, you own a tenth of that company.

The two primary methods of conducting a hostile takeover are the tender offer and the proxy fight. The bidding company must disclose their plans for the target company and file the proper documents with the Securities and Exchange Commission (SEC). A tender offer is a public bid for a large chunk of the target’s stock at a fixed price, usually higher than the current market value of the stock. The purchaser uses a premium price to encourage the shareholders to sell their shares. The offer has a time limit, and it may have other provisions that the target company must abide by if shareholders accept the offer.

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