A Hostile Bid is an unsolicited bid received by the target company. A bid is often seen as neutral in its initial approach, being neither friendly nor hostile. It is the response of the target management that will decide the nature of the bid and the subsequent corporate maneuvering. If it is deemed as unwanted or unnecessary, the nature of the bid will be seen as hostile. Should the bid receive management and board of director approval, or was initially solicited by target management, the bid will be considered friendly takeover.
The spreads in hostile bid deals are generally wider relative to friendly takovers. This reflects the additional level of risk involved and the lower Deal Closing Probability (DCP). Traders are advised to fully evaluate these situations and consider risk reducing measures when necessary. Diversification and reducing leverage or hedging with options are such possibilities.
Hostile Bid Examples
If the acquirer continues to pursue the deal, the process becomes known as a hostile takeover. There are a limited number of options open. The most common is for the acquirer may make an offer directly to stockholders after having announced its intentions. A bidder may initiate a hostile takeover through a tender offer. The acquirer attempts to purchase the target company’s stock at a fixed price above the current market price. Offering a premium above the current market price is intended to convince the current shareholders to sell. Another method of a hostile takeover strategy is to acquire a majority interest in the stock of the company on the open market.
A recent example of a hostile bid approach was the attempt by Xerox (XRX) to acquire HP (HPQ) via a stock plus cash deal. HP had repeatedly refused to indulge in negotiations claiming the offer price was too low much to the astonishment of Xerox. A soft version of the just say no defense. With the onset of the coronavirus pandemic, the deal ultimately fell apart. Another ongoing hostile bid is the pursuit of Red Robin (RRGB) by Vintage Capital.
See our article Hostile Takeovers and Merger Arbitrage – What All Traders Should Know for a discussion on how hostile takeovers effect the risks and rewards of merger arbitrage trading.
