Thanks to the machinations of a certain billionaire, the phrase "hostile takeover" has been widely spread in the media. But while it has long since entered the general lexicon, "hostile takeover" carries an air of ambiguity and opacity in the face of legal jargon.
From a general perspective, a hostile takeover occurs when a company, or person, attempts to take over another company against the wishes of the target company's management. That's the "hostile" aspect of a hostile takeover: merging or acquiring a company without the consent of that company's board of directors.
It is usually the case that one company, for example "Company A", submits a purchase offer to buy a second company ("Company B") for a price that is reasonable. The board of directors of Company B rejects the offer, determining that it is not in the best interest of the shareholders. But Company A tries to force the deal, opting for one of several strategies: a proxy vote, a public offering, or a big stock purchase.
The proxy route involves Company A persuading Company B shareholders to vote for the opposing management of Company B. This could involve making changes to the board of directors, such as installing members who explicitly support the takeover.
It is not an easy road. In addition to the challenge of mustering shareholder support, proxy attorneys, the specialized firms hired to help muster proxy votes, can challenge established proxy votes. This lengthens the acquisition timeline.
For this reason, the purchaser could make a public offer. With a takeover bid, company A offers to buy shares from shareholders of company B at a price above the market price (for example, 15 per share versus 10), with the aim of acquiring enough voting shares to have a majority stake in company B (usually more than 50% of the voting shares).
Tender bids tend to be expensive and time consuming. Depending on the legislation in each country, for example, the acquiring company may be required to disclose the terms of the offer, the source of the funds and the proposed plans if the acquisition is successful. The law can also set deadlines by which shareholders must make their decisions, giving both companies plenty of time to present their cases.
Alternatively, Company A could attempt to purchase the necessary voting shares in Company B on the open market (a “share purchase”). Or they could make an unsolicited offer public, a mild form of pressure.
Cases of hostile takeover attempts
Hostile takeovers make up a significant portion of overall mergers and acquisitions (M&A) activity. For example, in 2017, hostile takeovers according to reports they accounted for $575 billion in takeover deals, about 15% of the total M&A volume that year.
But how successful are hostile takeovers in general? According to CNET in 2002, between 1997 and 2002, targeted companies in the United States in all industries rejected between 30 and 40 percent of approximately 200 acquisition attempts, while between 20 and 30 percent agreed to be bought by companies "white blackbird" In the context of a hostile takeover, a “white blackbird” is a friendly investor who acquires a company with the support of the target company's board of directors when faced with a hostile takeover.
Limited to the last two decades or so, the tech industry hasn't seen a large number of hostile takeover attempts. That's partly because, as the CNET article points out, the value of technology companies it is often tied to the experience of your workers. As proof this month, hostile takeovers tend not to have positive social ramifications for the target workforce. The distraction and lingering uncertainty of hostile action could lead to a brain drain at both the upper and middle levels.
During the same time period mentioned above, from 1997 to 2002, there were only nine hostile takeover attempts against tech companies. Four were successful, including AT&T's purchase of business services provider NCR and IBM's purchase of software developer Lotus.
Hostile takeovers in the tech industry in recent years have been higher profile, but not necessarily more fruitful.
For example Xerox and Hewlett-Packard. In November 2019, Xerox, prompted by investor Carl Icahn, who owned a 10,6% stake, approached Hewlett-Packard's board with an offer to merge the two companies. Hewlett-Packard turned him down, and Xerox responded by announcing plans to replace the entire Hewlett-Packard board of directors and launching a formal takeover bid for Hewlett-Packard stock. Pandemic-affected market conditions proved unfavorable for the deal, and Xerox agreed to stop pursuing it in March 2020.
In 2018, tech giant Broadcom unsuccessfully made a hostile bid for semiconductor vendor Qualcomm. After trying to appoint 11 directors to Qualcomm's board, Broadcom raised its bid from roughly $100 billion to $121 billion and cut the number of board seats it was trying to win to six. But security concerns raised by US regulators and the possibility of interference from Broadcom's competition, including Intel, prompted Broadcom to eventually pull out.
That's not to say that hostile technology takeovers are a fracaso inevitable. In 2003, Oracle announced an intent to acquire human resources software provider PeopleSoft in an all-cash deal valued at $5.300 billion. Oracle succeeded with a higher offering price, overcoming 18 months of back and forth and a court battle over PeopleSoft shareholder dispositions.
The Disadvantages of Hostile Takeovers
The high failure rate is not the only factor deterring hostile takeovers. Other potential dangers include tainting the hostile bidder's negotiating history and significant expenses to the acquirer in the form of advisory fees and regulatory compliance.
Companies have also prepared for hostile takeovers and employ a variety of defenses to protect the decision-making power of their management. For example, they may buy back shares from shareholders or implement statutory clauses ("poison pills"), which significantly dilute an acquirer's voting shares in the target company. Or, they may establish a "tiered committee," in which only a certain number of directors are re-elected annually.
A note on poison pills. In this Biryuk Law blog post explains that there are three main types: a flip-in, a "dead hand" and a "no hand".
Other anti-acquisition measures include changing contractual terms to make the target's agreements with third parties onerous; burden the acquirer with debt; and require the vote of the qualified majority of the shareholders for the activity of mergers and acquisitions. The downside of these, some of which require shareholder approval, is that they can deter friendly takeovers. That is part of the reason why the poison pills, once common in the 1980s and 1990s, fell out of favor in the 2000s. But many companies find the risk worth it. In March 2020 alone, 57 public companies have adopted poison pills in response to an activist threat or as a preventive measure; Yahoo and Netflix are among those that in recent years have used poison pills.
Tech giants often employ protective stock structures as an added defense. Facebook is a prime example: The company has a "double-class" structure designed to maximize the CEO's voting power. Mark Zuckerberg and only a small group of insiders. Twitter is an anomaly in that it only has one class of shares, but its board retains the right to issue preferred shares, which could carry special voting rights and other privileges. (The Wall Street Journal reported that Twitter is considering adopting a poison pill).
However, some corporate raiders will not be deterred, either by strategic considerations or because, as in the case of Elon Musk and Twitter, believe that the target company's management is not delivering on its promises. They might try to recruit other shareholders to their cause to improve their chances of success, or put public pressure on a company's board until they reconsider an offer. They could also invoke the revlon ruler the legal principle that the CEO of a company must make a reasonable effort to obtain the highest value for a company when a hostile takeover is imminent.
But as history has shown, hostile takeovers, even when successful, are rarely predictable.
