Hostile takeover bid

A hostile takeover bid is one that is made despite the opposition to it expressed by the directors of the target (the company that would be taken over).

There are a number of ways in which the directors of the target may attempt to block the takeover (beyond simply advising shareholders against it) including:

  • a poison pill to make the takeover more expensive
  • Finding a white knight (a bidder the directors prefer)
  • increasing the target's market cap by making acquisitions of its own, paid for by issuing new shares.

Hostile bids often reveal a serious conflict of interest between shareholders and directors. Shareholders are offered a chance to sell their shares, usually at substantially above the market price prior to the bid. Directors stand to lose their jobs.

In theory, directors should recommend a bid unless they have a good chance of getting a better offer, or have very good reason to believe that the market is undervaluing their company. How impartial a decision directors will realistically make is obviously questionable.

Some financial economists have suggested that one of the key reasons for the occurrence of hostile bids is that they offer a way in which to replace incompetent but well entrenched management. This is because institutional shareholders rarely vote against incumbent management, making it hard to replace the directors even if they under-perform.

This also explains why greenmail has been a successful tactic, except when restrained by regulation.

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