Hostile Takeovers

A hostile takeover is a corporate acquisition that is forcefully resisted by the target firm's top management and board of directors. Although they constitute less than 3 percent of all merger and acquisition (M&A) activity, hostile takeovers have long garnered a disproportionately large share of attention from the news media, the general public, and business scholars for many reasons. Compared to so-called friendly M&As, which are generally planned and negotiated in relative secrecy, hostile takeovers tend to unfold in a more public arena, where representatives of both the acquirer (popularly called a “raider”) and target firm vie for the favor of shareholders, regulators, and other influential parties. Sociologists note how the intensity and ritualized nature of these contests has contributed to the unusually colorful terminology used to describe hostile takeovers. More than virtually any other corporate activity, hostile takeovers bring about abrupt and dramatic changes to a firm's strategy, structure, and leadership.

Hostile takeovers have remained a highly controversial practice since their inception in the United States during the early 1950s. While proponents argue that hostile takeovers serve an important corporate governance function that helps maximize shareholder value, critics emphasize their potentially damaging effect to such stakeholders as workers, the local community, and managers of the target firm.

Tender Offers and Proxy Contests

Within the United States, hostile takeovers are most frequently attempted through a financial and legal mechanism known as a tender offer (i.e., a public solicitation to purchase shares of the target company at a fixed price, within a given time period, and usually contingent upon shareholders tendering sufficient shares for the bidder to gain control of the firm). To convince shareholders to sell their shares, the tender offer price is usually set at a significant premium over the current market price (frequently 50 percent or more). Prior to announcing a tender offer, a raider will often purchase shares in the open stock market at prevailing market prices. Such purchases enable the raider to minimize the cost of a successful acquisition, and to sell these shares (often at a significant profit) if the hostile takeover attempt is not completed. Once accumulating more than 5 percent of a voting class of a company's equity, however, the acquirer is required by United States law to file a Schedule 13D (beneficial ownership report) within 10 days. Since the acquirer must disclose the purpose for the share purchase within Schedule 13D, the filing of this report often marks the beginning of the takeover battle.

With the extensive reporting requirements defined by federal law, particularly the Securities Exchange (1934) and Williams (1968) Acts, it would be very difficult in the United States for a party, or group of parties acting together, to gain control of a company solely by accumulating shares gradually in the open market (a practice known as a “creeping tender offer”). Some international business experts suggest that this approach may become an increasingly frequent and less costly alternative to traditional tender offers in countries with less stringent reporting requirements. At present, however, tender offers continue by far to be the most common hostile takeover mechanism worldwide.

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