Lose It All: A Hostile Takeover

A person holding a red stick with a line drawn on it

What Are The Causes?

A hostile takeover is the aggressive integration of one company into another, injecting its own staff, displacing its top management and board of directors, and introducing alien corporate values. Hostile takeovers can be initiated by aggressor companies as well as corporate raiders, whose aim is to profit from the collapse of the victim. Usually, such takeovers generate a wide public reaction.

How and Why Does a Hostile Takeover Happen?

Usually, corporations with a large market capitalization try to take over a promising company to strengthen their position while at the same time eliminating an upcoming competitor. This is one of the most frequent reasons for a hostile takeover. Some of the other reasons can be:

Target company – strategically attractive (emergence of a promising new industry or innovation it is developing).

Low valuation of the company. This factor, combined with a poor credit history, currency fluctuations, a weak capital structure, and an incompetent management team, may make the company vulnerable to corporate takeovers.

Weak defenses. Businesses cannot react quickly to hostile takeovers: the anti-crisis strategy does not spell out protection mechanisms, and shareholders are reluctant to fight back.

Shareholders demand change, but management does not support it. The aggressor can take advantage of this by promising shareholders that the new “regime” will be more responsive to their demands. The disintegration will start from within the victim company.

If a company is already publicly traded, an aggressor company can make a hostile takeover bid. Specifically, companies with a low valuation become easy targets. For some Deep-tech companies which have chosen a financial strategy to raise capital through an early public offering, this is something to consider. Early presence on the market will require discipline in achieving projected results. The lack of results will result in a steep drop in the share price (penny stock) and make the company an easy target for a (hostile) takeover.

How Can A Company Protect Itself From A Hostile Takeover?

It is important to balance protective measures with the need to bring in new (venture) capital
Some of the protective measures can and will work against new investors. It will require special measures in the shareholders agreements, resulting in a patchwork of clauses. This will further complicate negotiations and new investments down the line.

A Poison Pill

If one shareholder (the aggressor company) buys more than an agreed block of shares, other existing contributors can buy newly released shares at a discount. This dilutes the stake of the company that wants to take over the business. At the same time, there is no discount for the aggressor.

Crown Jewels

By adopting this defensive tactic, the company is required by statute to sell its most valuable assets to shareholders if a serious threat appears on the horizon. This makes the organization less attractive to hostile corporations.

Differential Voting Rights (DVR)

To protect itself against a takeover, a company can set a higher dividend (a fraction of the profits of a public company) on shares with less voting rights. That is, two investor shares will receive one vote.

Thus, securities with less voting rights become more attractive to buy because of these dividends. And the top management keeps the shares with more voting rights and controls the situation.

Employee Stock Ownership Plan (ESOP)

Under this plan, team members can own a substantial fraction of the company. If a takeover threatens employee, shareholders are more likely to vote for management.

Source: dealroom.net, Investopedia, Statista

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