Hostile M&A: The What, the Where and the Why
Most people are familiar with a traditional company takeover. The two or more businesses come together and hammer out an agreement covering all the aspects and legalities of the deal. Once the merger and acquisition has been completed, the new entity emerges as one business that is the combination of all the companies involved. What you may not be so familiar with, however, is the hostile merger and acquisition (M&A), which occurs when a company involved in the M&A isn’t in that position voluntarily.
A hostile takeover is the acquisition of one company by another but with the targeted business resisting the deal, often with its board of directors and management fighting the move. These types of deals are viewed as risky. Employee morale levels drop as changes and staff cuts are made, making the combination of the businesses a bumpy ride for all those involved.
There’s no one set of circumstances that guarantees a hostile takeover bid. It’s usually done by the acquiring business with the common goal of benefiting stockholders. That’s why the “right” environment for such an action depends on each company’s specifics at the time, such as market position and industry placement.
While there’s no guaranteed defense against a hostile takeover bid, a company that finds itself targeted can take action to try to thwart the attempt. Golden parachutes, for example, can dissuade hostile takeover bids. The acquiring company may not be able to handle the millions of dollars and other lucrative benefits the executives with the parachutes are entitled to by contract.
With the “macaroni defense,” the targeted business issues bonds that guarantee a higher payout if the company is taken over. The bonds balloon, like noodles in a pot, if the company is in danger of being acquired. When using the macaroni defense, the company issuing the bonds has to be careful to avoid creating so much debt that it can’t handle the interest payments.
In a “people pill” move, the target company’s management team threatens to walk at once if the business is taken over. Whether this strategy is effective or not largely depends on the plans the acquiring company had for management in the first place and how strong the team is. If the management team is good, the threat of losing them all at once and harming the company might make the acquiring business think twice.
A target company may try to stall the deal and wait for a “white knight” to arrive, although this may backfire if internal operations begin to suffer as a result. The white knight is a non-hostile company that approaches the target and offers a friendly takeover bid. Since a friendly bid allows the target company to have some control over the deal and its terms, it’s far more favorable than a hostile takeover.