A hostile takeover occurs when one firm purchases a target company without the agreement of the target's management. Mergers and acquisitions aren't always equally advantageous for both parties. Oftentimes they are not agreed upon, by the management in both companies.
The expression hostile takeover is related to the takeover of one corporation by another against the former's desires. The firm being purchased in a hostile takeover is referred to as the target company, while the corporation carrying out the acquisition is referred to as the acquirer.
In a hostile takeover, the acquirer goes straight to the company's shareholders or tries to replace management in order to obtain approval for the acquisition. A hostile takeover is often approved through either a tender offer or a proxy fight. A target firm might also use a number of methods to protect itself against the acquisition. The Pac-Man defense, the crown-jewel defense, and the golden parachute are some of the most creatively named techniques.
How does a hostile takeover occur?
A hostile corporate takeover might use a variety of methods, but they all have one thing in common: the target company's management does not agree with the deal. The purchasing firm may feel the target is undervalued, or they may wish to get access to the target's industry position and existing brand awareness. Here are the two major strategies used to address the issue of how does a hostile takeover work:
An acquiring firm may offer to purchase shares from shareholders at a price higher than the market price. This is known as a tender offer, and it is intended to acquire enough shares to manage the target company's stock holding. In most situations, this must be at least 50% of the voting stock.
For example, if the current market price of Company X's shares is $10, Company Y might make a tender offer to acquire Company X's shares for $15. The objective of a tender offer is to buy enough voting shares to gain possession of the targeted firm. Normally, this implies that the purchaser must possess more than 50% of the voting capital.
In reality, most tender offers are determined depending on the buyer obtaining a certain number of shares. If not sufficient shareholders are prepared to sell their shares to Company Y to supply it with a controlling stake, the tender offer at $15 per share will be canceled.
The second way to affect a takeover is through a proxy vote. The acquiring firm uses a proxy vote to persuade existing shareholders. To either vote out the current management or change the board structure. Deposing the present board of directors, which is opposed to the purchase. The takeover firm may install new management, who will accept the transaction instead.
For instance, Company Y might encourage Company X shareholders to use their proxy votes to alter the corporation's board members. The objective of such a proxy vote is to eliminate the board members who are opposed to the acquisition and replace them with new committee members who are more favorable to a change in ownership. As a result, they will vote to support the takeover.
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