Many successful corporations often become targets for larger companies. These larger entities may propose a merger with the smaller company, or seek to acquire it through purchasing its stock shares. When one company attempts to buy a controlling interest in another through stock purchases, the purchasing entity is engaging in a "takeover."
What is a Friendly Takeover?
A "friendly takeover," also called an "acquisition," occurs when the acquiring company informs the target company's board of directors that it plans to purchase a controlling interest. The board of directors then votes on the proposed buyout. If the board believes the stock purchase would benefit the current stockholders, they vote in favor of the sale. The acquiring company then takes control of the target company's operations and may or may not choose to keep the target company's board of directors in place.
What is a Hostile Takeover?
A "hostile takeover" happens when the target company's board of directors votes down the stock sale to the acquiring company. Agents of the acquiring company then attempt to purchase the target company's stock from other sources, gain a controlling interest and force out the board members who voted against the acquisition. When this happens, the acquiring company will aggressively go after shares of the target firm, while the target's board of directors prepares to fight for survival.
Hostile Takeover Methods
The two methods used to execute a hostile takeover are the "tender offer" and the "proxy fight." In a "tender offer," the acquirer offers to buy shares directly from shareholders at a price above that available on the open market. The premium placed on the tender offer acts as an incentive to induce shareholders to sell to the acquirer. In a "proxy fight," the acquirer persuades the shareholders to vote out the current board of directors and vote in those who are more receptive to the acquirer's offer.
Fighting a Hostile Takeover
A corporation may choose to buy back its shares to protect itself from a hostile takeover. With this method, the shares needed to stage the takeover will be in the target company's holdings, not in the open market.
Another method is a shareholder's rights plan, also called a "poison pill,", which enables shareholders to buy new target company stock at a discount if one entity owns a large percentage of outstanding shares. This plan forces the acquirer to negotiate directly with the target company's board, rather than seeking to acquire stock through the shareholders.
Terms such as "hostile takeover," "poison pill" and "target company" give the impression of the boardroom as a battlefield. In the corporate world, a takeover can result in lost jobs, volatile stock prices and damage to a firm's reputation. While most of those involved in a takeover need not worry about physical scars, the wounds from such a combative environment can affect the lives of those involved for years to come.