Noha Gad
Companies in the world of business grow through careful planning and friendly agreements. Leaders talk about partnership, shared goals, and future success. Yet there exists a more aggressive path to growth, where such collaboration is not welcome, and the fight for control is direct and fierce. This path is defined by a direct and forceful attempt to seize control against the clear wishes of the existing leadership.
This action is known as a hostile takeover. It happens when a company tries to buy another company against the wishes of its leaders, unlike friendly takeovers, where both companies agree. The buyer ignores the management and appeals directly to the company's owners and shareholders. It is a high-stakes contest that can change companies, industries, and careers.
What is a hostile takeover?
A hostile takeover happens when an entity takes control of a company against the wishes of the company's management. The company being acquired in a hostile takeover is called the target company, while the one executing the takeover is called the acquirer.
This strategy requires the entity to acquire and control more than 50% of the company’s voting shares, allowing the new majority shareholders to control the acquired business. Key parties of a hostile takeover are: the buyer, the company or group that wants control; the target company, the firm being bought, whose leaders resist with plans and lawsuits; the shareholders; the owners who hold shares; and the regulators, government bodies that check for fair play and market rules.
How does it work?
A hostile takeover follows set steps in which the buyer acts with care and speed. These steps are:
* Selecting and reviewing the target. The buyer chooses a company, then checks the share price, debt, and profits. The worth of the target company must be more than its market value.
* Buying shares. The buyer starts with small purchases, using brokers to stay hidden.
* Making a public offer. In this step, the buyer goes public, files with the regulations, and offers cash for shares.
* Raising funds. The buyer can raise money through multiple options, including its own cash reserves, issuing new shares, securing loans, or partnering with banks and investors.
* Proxy fight (if needed). If the offer does not succeed, the buyer launches a proxy fight by seeking shareholder votes to elect new board members, which allows changes to company rules that favor the takeover.
* Securing approvals. In this step, regulators review and approve the deal to ensure compliance with antitrust laws and market protections.
* Taking control. By securing over 50% of shares, the buyer can assume control, appoint new leadership, and complete the acquisition.
Defense strategies against hostile takeovers
Companies can follow different strategies to prevent unwanted hostile takeovers. These strategies are:
-Differential Voting Rights (DVRs). Through this strategy, the company can establish stock with differential voting rights (DVRs), where some shares carry greater voting power than others. This makes it more difficult to generate the votes needed for a hostile takeover if management owns a large portion of shares.
-Employee Stock Ownership Program (ESOP). The ESOP involves using a tax-qualified plan in which employees own a substantial interest in the company. Employees can be more likely to vote with management.
-Crown Jewel. In this defense strategy, a provision of the company’s bylaws requires the sale of the most valuable assets if there is a hostile takeover, thereby making it less attractive as a takeover opportunity.
- Poison Pill (officially known as a shareholder rights plan). This tactic allows existing shareholders to buy newly-issued stock at a discount if one shareholder has bought more than a stipulated percentage of the stock, resulting in a dilution of the ownership interest of the acquiring company. There are two types of poison pill defenses: the flip-in and flip-over. A flip-in allows existing shareholders to buy new stock at a discount if someone accumulates a specified number of shares of the target company, while the flip-over strategy allows the target company's shareholders to purchase the acquiring company's stock at a deeply discounted price if the takeover goes through.
Hostile takeovers produce both positive effects and serious issues for companies, shareholders, and markets, often sparking debate about their overall value. They unlock higher value for shareholders by offering premiums on shares that reflect the company's true worth, while driving better operations through new leadership that cuts waste and boosts efficiency in areas like fintech innovation. On the other side, they carry risks such as job losses when the buyer reduces staff to lower costs and a focus on short-term gains that ignores long-term growth plans. Some view hostile takeovers as healthy competition that rewards strong owners, whereas others see them as predatory actions that harm workers and stable businesses.
Finally, the path of the hostile takeover presents a different and more confrontational alternative. This process, defined by the direct acquisition of a target company against the expressed wishes of its leadership, unfolds as a high-stakes contest for control, fundamentally reshaping organizations and markets. These takeovers can serve as a powerful instrument of market discipline; however, they carry significant negative consequences.
Ultimately, hostile takeovers embody the tension between the aggressive pursuit of opportunity and the principles of corporate autonomy and strategic continuity. While it can act as a catalyst for positive change and value creation, it also represents a potentially disruptive and predatory force.