Hostile Takeover and Ethics

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  • Topic: Takeover, Tender offer, White knight
  • Pages : 21 (6769 words )
  • Download(s) : 810
  • Published : October 16, 2008
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Executive Summary

When one company (called the acquirer or bidder) acquires another company (called the target), then it is called takeover. Takeover can be of two types: Friendly Takeover and Hostile Takeover.

In Friendly Takeover, the bidder informs the target of their takeover plans. If the target feels that the takeover will help its shareholders, then it generally accepts the takeover offer.

A Hostile Takeover is an acquisition in which the company being purchased doesn't want to be purchased, or doesn't want to be purchased by the particular buyer that is making a bid. Members of management might want to avoid acquisition because they are often replaced in the aftermath of a buyout. They are simply protecting their jobs. The board of directors or the shareholders might feel that the deal would reduce the value of the company, or put it in danger of going out of business. Then, how can someone buy something that's not for sale? Hostile takeovers only work with publicly traded companies. That is, they have issued stock that can be bought and sold on public stock markets. A stock confers a share of ownership in the company that issued it. If a company issued 1,000 shares, and say Mr. X owns 100 of them, then he owns a tenth of that company. If he owns more than 500 shares, he owns a majority or controlling interest in that company. When the company makes major decisions, the shareholders must vote on them. The more shares you have, the more votes you get. If you own more than half of the shares, you always have a majority of the votes. In many respects, you can control the company. So a hostile takeover boils down to this: The buyer has to gain control of the target company and force them to agree to the sale.

The two primary methods of conducting a hostile takeover are the tender offer and the proxy fight.

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.

Sometimes, a purchaser or group of purchasers will gradually buy up enough stock to gain a controlling interest (known as a creeping tender offer), without making a public tender offer. This bypasses the Williams Act, but is risky because the target company could discover the takeover and take steps to prevent it.

In a proxy fight, the buyer doesn't attempt to buy stock. Instead, they try to convince the shareholders to vote out current management or the current board of directors in favor of a team that will approve the takeover. The term "proxy" refers to the shareholders' ability to let someone else make their vote for them -- the buyer votes for the new board by proxy.

Often, a proxy fight originates within the company itself. A group of disgruntled shareholders or even managers might seek a change in ownership, so they try to convince other shareholders to band together. The proxy fight is popular because it bypasses many of the defenses that companies put into place to prevent takeovers. Most of those defenses are designed to prevent takeover by purchase of a controlling interest of stock, which the proxy fight sidesteps by changing the opinions of the people who already own it.

The most famous recent proxy fight was Hewlett-Packard's takeover of Compaq. The deal was valued at $25 billion, but Hewlett-Packard reportedly spent huge sums on advertising to sway shareholders. HP wasn't fighting Compaq -- they were fighting a group of investors that included founding members of the company who opposed the merge. About 51 percent of shareholders voted in favor of the merger. Despite attempts to halt the deal on legal grounds, it went as planned.

In a Hostile Takeover, all the stakeholders of the target company suffer at...
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