A hostile takeover, or hostile bid, suggests an acquirer is attempting to take over a target company whose management is unwilling to agree to a merger or buyout on friendly terms. A takeover is considered hostile if the target company’s board rejects the offer. The hostile takeover is the process of pursuing the deal once the initial bid, deemed as a hostile bid, has been rejected.
In retaliation to the hostile takeover approach, the target firm may invoke a number of defensive actions known as shark repellents. The most famous of these is the poison pill. Although initially reducing the deal closing probability, these actions may force the bidder to raise their bid and ultimately provide an attractive return for the trader. However, hostile takeover situations are often less likely to consummate. As such, they are considered as investments with a higher level of risk. During this period, the actions and recommendation of Proxy Advisory firms may come into significance. If the situation moves on to a tender offer or a proxy contest in the boardroom, large institutional investors will seek advice on how their shares should be voted.
Hostile Takeover Example
If the acquirer continues to pursue the deal 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 acquisition 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 intented 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.
See our article Hostile Takeovers and Merger Arbitrage – What All Traders Should Know for a discussion on how hostile takeovers effect merger arbitrage trading.
