Hostile Takeover

Hostile Takeover

The acquisition of one company (called the target company) by another (called the acquirer) that is accomplished not by coming to an agreement with the target company's management, but by going directly to the company’s shareholders or fighting to replace management in order to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight.

The key characteristic of a hostile takeover is that the target company's management does not want the deal to go through. Sometimes a company's management will defend against unwanted hostile takeovers by using several controversial strategies.

'Crown Jewels'

The most valuable unit(s) of a corporation, as defined by characteristics such as profitability, asset value and future prospects. The origins of this term are derived from the most valuable and important treasures that sovereigns possessed.

Despite the fact that crown jewels are often the most valuable part of a company, some companies opt to use their crown jewels as part of a takeover defense. A company can employ this crown jewels defense by creating anti-takeover clauses which compels the sale of their crown jewels if a hostile takeover occurs. This deters would be acquirers from attempting to take the firm over.

'Golden Parachute'

Lucrative benefits given to top executives in the event that a company is taken over by another firm, resulting in the loss of their job. Benefits include items such as stock options, bonuses, severance pay, etc.

A golden parachute can be used as a measure to discourage an unwanted takeover attempt.

'Pac-Man Defense'

A defensive tactic used by a targeted firm in a hostile takeover situation. In a Pac-Man defense, the target firm turns around and tries to acquire the other company that has made the hostile takeover attempt. This term has been accredited to Bruce Wasserstein, chairman of Wasserstein & Co.

This term comes from the Pac-Man video game. In the game, once Pac-Man eats a power pellet he is able to turn around and eat the ghosts that are chasing after him in the maze.

When one company makes an unsolicited and aggressive bid on another publicly traded company, the takeover attempt may not be welcomed by the targeted firm. In an attempt to scare off the would-be acquirers, the takeover target may use any method in an attempt to acquire the other company, including dipping into its war chest for cash to purchase the other company's stock

"Dont Forget to Share Your Views"

 

[Swaswati Borpuzari]

A hostile takeover is a significant corporate action where one company attempts to acquire control of another company without the consent of the target company's board of directors. This type of acquisition is often characterized by its aggressive and unwelcome nature, as the target company may resist the takeover attempt. Hostile takeovers can occur through various methods, such as tender offers, proxy contests, and creeping takeovers, where the acquiring company gradually buys up shares of the target company. The motivations behind a hostile takeover can vary, ranging from the desire to gain control of valuable assets, expand market share, or eliminate competition. However, these takeovers are often met with significant resistance, including legal challenges, shareholder activism, and defensive tactics by the target company's management. Such tactics might include the issuance of additional shares to dilute the acquirer's stake, the sale of valuable assets (often referred to as a "fire sale"), or the adoption of a poison pill strategy, which makes the acquisition more expensive or difficult. Despite the challenges, successful hostile takeovers can lead to significant changes in corporate ownership and strategy, sometimes resulting in increased efficiency and shareholder value, but also potentially causing disruption and job losses. The ethical and legal implications of hostile takeovers are often debated, with critics arguing that they can undermine the interests of stakeholders and lead to short-termism, while proponents maintain that they can force necessary changes and improvements in underperforming companies.

 

[Dhruv Bindhani]

This article effectively defines "Hostile Takeover" and then details three specific defensive strategies a target company might employ: 'Crown Jewels,' 'Golden Parachute,' and 'Pac-Man Defense.' The explanations are clear, concise, and enhance understanding of these complex corporate maneuvers.

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Hostile Takeover: An Overview​

The article accurately defines a hostile takeover as the acquisition of a "target company" by an "acquirer" without the consent of the target's management. Instead, the acquirer directly approaches the company's shareholders or attempts to replace existing management to gain approval for the acquisition. The key characteristic is the unwillingness of the target company's management to proceed with the deal. The article notes that hostile takeovers are typically accomplished through a tender offer (an offer directly to shareholders to buy their shares) or a proxy fight (soliciting shareholder votes to replace the board of directors).

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Defensive Strategies Against Hostile Takeovers​

The article then delves into three common and often controversial strategies employed by target companies to defend against unwanted hostile takeovers:

1. 'Crown Jewels' Defense​

• Definition: The "Crown Jewels" refer to a corporation's "most valuable unit(s)," identified by their profitability, asset value, and future prospects. The term itself evokes the idea of a monarch's most prized possessions.
• Defense Mechanism: In a 'Crown Jewels' defense, a company tries to deter acquirers by making itself less attractive. This can be achieved by creating "anti-takeover clauses" that compel the sale of these most valuable assets if a hostile takeover occurs. The idea is that if the very assets an acquirer desires are disposed of, the acquisition becomes less appealing, thereby "deter[ing] would be acquirers." This is often a last-ditch effort, as it can significantly damage the target company's long-term prospects even if the takeover is avoided.

2. 'Golden Parachute'​

• Definition: A "Golden Parachute" refers to "lucrative benefits given to top executives" if their company is acquired and they lose their jobs as a result. These benefits can include "stock options, bonuses, severance pay, etc."
• Defense Mechanism: The article states that a golden parachute can be used to "discourage an unwanted takeover attempt." The rationale is that the substantial payouts to executives upon a successful hostile takeover would significantly increase the acquisition cost for the acquirer, making the deal less financially attractive. While controversial due to the perception of executives enriching themselves, it serves as a potential financial deterrent.

3. 'Pac-Man Defense'​

• Definition: The "Pac-Man Defense" is described as a "defensive tactic" where the "target firm turns around and tries to acquire the other company that has made the hostile takeover attempt." The term is attributed to Bruce Wasserstein and vividly derived from the Pac-Man video game, where the protagonist turns the tables on its pursuers after consuming a power pellet.
• Defense Mechanism: This is an aggressive and often high-risk maneuver. When faced with an unsolicited bid, the target company might use its "war chest for cash to purchase the other company's stock," aiming to gain control of the aggressor or at least deter the takeover through a costly counter-attack. This strategy requires significant financial resources from the target company and can result in substantial financial strain for both parties, as seen in historical examples like Bendix and Martin Marietta.

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Conclusion​

The article provides a solid foundational understanding of hostile takeovers and some of the more dramatic defensive strategies employed in such corporate battles. These tactics highlight the high stakes and often intense financial and strategic maneuvers involved when a company's management resists an acquisition attempt.