Thanks to the machinations of a certain billionaire, the phrase “hostile takeover” has been liberally bandied about the media sphere recently. But while it long ago entered the mainstream lexicon, “hostile takeover” carries with it an air of vagueness — and legalese opaqueness.
At a high level, a hostile takeover occurs when a company — or a person — attempts to take over another company against the wishes of the target company’s management. That’s the “hostile” aspect of a hostile takeover — merging with or acquiring a company without the consent of that company’s board of directors.
How it usually goes down is, a company — let’s call it “Company A” — submits a bid offer to purchase a second company (“Company B”) for a (reasonable) rate. Company B’s board of directors rejects the offer, determining it to not be in the best interest of shareholders. But Company A attempts to force the deal, opting for one of several strategies: A proxy vote, a tender offer, or a large stock purchase.
The proxy vote route involves Company A persuading shareholders in Company B to vote out Company B’s opposing management. This might entail making changes to the board of directors, like installing members who explicitly support the takeover.
It’s not necessarily easy street. Aside from the challenge of rallying shareholder support, proxy solicitors — the specialist firms hired to help gather proxy votes — can challenge proxy votes. This extends the takeover timeline.
That’s why an acquirer might instead make a tender offer. With a tender offer, Company A offers to purchase stock shares from Company B shareholders at a price higher than the market rate (e.g., $15 a share versus $10), with the goal of acquiring enough voting shares to have a controlling interest in Company B (typically over 50% of the voting stock).
Tender offers tend to be costly and time-consuming. By U.S. law, the acquiring company is required to disclose its offer terms, the source of its funds and its proposed plans if the takeover is successful. The law also sets deadlines by which shareholders must make their decisions, and it gives both companies ample time to state their cases.
Alternatively, Company A could attempt to buy the necessary voting stock in Company B in the open market (a “toehold acquisition”). Or they could make an unsolicited offer public, a mild form of pressure known as a “bear hug.”
A short history of hostile takeover attempts
Hostile takeovers constitute a significant portion of overall merger and acquisition (M&A) activity. For example, in 2017, hostile takeovers reportedly accounted for $575 billion worth of acquisition bids — about 15% of that year’s total M&A volume.
But how successful are hostile takeovers, typically? According to a 2002 CNET article, between 1997 and 2002, target companies in the U.S. across all industries fended off 30 percent to 40 percent of the roughly 200 takeover attempts while 20 percent to 30 percent agreed to be purchased by “white knight” companies. In the context of a hostile takeover, a “white knight” is a friendly investor that acquires a company with support from the target company’s board of directors when it’s facing a hostile acquisition.
Confined to the past two decades or so, the tech industry hasn’t seen an outsized number of hostile takeover attempts. That’s partly because — as the CNET piece notes — the value of tech companies is often tied to the expertise of its workers. As evidenced this month, hostile takeovers tend not to have positive social ramifications for the target’s workforce. The distraction and lingering uncertainty from a hostile action could lead to a flight of talent at both the top and middle levels.
During the same time frame referenced earlier — 1997 to 2002 — there were only nine hostile takeover attempts against tech companies. Four were successful, including AT&T’s buyout of enterprise service provider NCR and IBM’s purchase of software developer Lotus.
Hostile takeovers in the tech industry in recent years have been higher in profile — but not necessarily more fruitful.
Take Xerox and Hewlett-Packard, for example. In November 2019, Xerox — spurred on by activist investor Carl Icahn, who owned a 10.6% stake — approached Hewlett-Packard’s board with an offer to merge the two companies. Hewlett-Packard rejected it, and Xerox responded by announcing plans to replace Hewlett-Packard’s entire board of directors and launching a formal tender offer for Hewlett-Packard’s shares. Pandemic-affected market conditions proved unfavorable for the deal, and Xerox agreed to cease pursuing it in March 2020.
In 2018, tech giant Broadcom unsuccessfully made a hostile bid for semiconductor supplier Qualcomm. After attempting to nominate 11 directors to Qualcomm’s board, Broadcom raised its offer from roughly $100 billion to $121 billion and cut the number of board seats it was trying to win to six. But security concerns raised by U.S. regulators and the possibility of interference from Broadcom’s competition, including Intel, led Broadcom to eventually withdraw.
That isn’t to suggest hostile tech takeovers are a forgone failure. In 2003, Oracle announced a takeover attempt of HR software vendor PeopleSoft in an all-cash deal valued at $5.3 billion. Oracle succeeded at a higher bid price, overcoming 18 months of back-and-forth and a court battle over PeopleSoft’s shareholder provisions.
The downsides of hostile takeovers
The high failure rate isn’t the only factor dissuading hostile takeovers. Other potential pitfalls include tainting the dealmaking track record of the hostile bidder and major expenses for the acquirer in the form of advisor and regulatory compliance fees.
Companies have also wisened up to hostile takeovers and employ a range of defenses to protect their management’s decision-making power. For example, they can repurchase stock from shareholders or implement a “poison pill,” which considerably dilutes an acquirer’s voting shares in the target company. Or, they can establish a “staggered board,” in which only a certain number of directors is re-elected annually.
A note about poison pills, for those curious. As this Biryuk Law blog post helpfully explains, there are three main kinds: a flip-in, a “dead hand,” and a “no hand.” With a flip-in poison pill, shareholders can force a pill redemption by a vote if the hostile offer is all-cash for all of the target’s shares. A dead hand pill creates a continuing board of directors, while a no hand pill prohibits the redemption of the pill within a certain period.
Other anti-takeover measures include changing contractual terms to make the target’s agreements with third-parties burdensome; saddling the acquirer with debt; and requiring a supermajority shareholder vote for M&A activity. The drawback of these — some of which require shareholder approval — is that they might deter friendly acquisitions. (That’s partially why poison pills, once common in the 1980s and 1990s, fell out of favor in the 2000s.) But many companies consider the risk worthwhile. In March 2020 alone, 57 public companies adopted poison pills in response to an activist threat or as a preventive measure; Yahoo and Netflix are among those who’ve in recent years used poison pills. (Full disclosure: Yahoo is the parent company of TechCrunch.)
Tech giants commonly employ protectionist share structures as an added defense. Facebook is a prime example — the company has a “dual class” structure designed to maximize the voting power of CEO Mark Zuckerberg and just a small group of insiders. Twitter is an anomaly in that it only has only one class of shares, buts its board retains the right to issue preferred stock, which could come with special voting rights and other privileges. (The Wall Street Journal reported this week that Twitter is weighing adopting a poison pill.)
Some corporate raiders won’t be deterred, though, whether because of strategic considerations or because — as in the case of Elon Musk’s and Twitter — they believe that the target company’s management isn’t delivering on their promises. They might attempt to recruit other shareholders for their cause to improve their chances of success, or apply public pressure to a company’s board until they reconsider a bid. They could also invoke the Revlon rule, the legal principle stating that a company’s board shall make a reasonable effort to obtain the highest value for a company when a hostile takeover is imminent.
But as history has shown, hostile takeovers — even when successful — are rarely predictable.