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Explaining the hostile takeover

by | Mar 7, 2023 | Mergers and Acquisitions

The world of corporations, both in New York and worldwide, is an ever-changing landscape of companies being born, merging with other entities or being acquired and sometimes dying. These transitions can take many forms; some are complex and challenging.

The term “hostile takeover” refers to a method by which one company acquires another without the consent of the acquired company’s leadership. In the broad category of mergers and acquisitions, the hostile takeover represents one of the most aggressive ways a company can expand.

How does a hostile takeover work?

The standard takeover or acquisition model involves two corporate leadership bodies coming to the agreement that one company purchases the other and takes control. However, in some cases one company may be interested in acquiring another but the second company’s leadership is uninterested in selling.

In that scenario, the company interested in acquiring could consider a hostile takeover to bypass the second company’s leadership. There are two primary forms of hostile takeover:

The most common form of hostile takeover involves the acquiring company going directly to the second company’s shareholders. The acquiring company attempts to purchase enough shares to gain a controlling interest, usually offering a premium above the share price to convince shareholders to sell.

The other method is known as a proxy contest. In a proxy contest, the acquiring company tries to replace enough members on the target company’s board to change the board’s decision about selling.

Companies can make hostile takeovers more difficult

The idea behind a hostile takeover is that it allows an acquiring company to make the acquisition regardless of the wishes of its target. But companies do have ways to make hostile takeovers less attractive.

The most common method, known as a “poison pill,” involves creating a mechanism by which stock is diluted once an acquiring party gains a certain amount. This makes it far more expensive for a company to succeed in a hostile takeover.

A hostile takeover represents a type of acquisition in which the acquiring company can disregard the wishes of the company it acquires. By either directly approaching shareholders or altering the board of directors, the acquiring company unilaterally gains control of its target.