What is a Hostile Takeover?
How a Hostile Takeover Works
In a hostile takeover, the target company's board of directors rejects the offer, but the bidder continues to pursue the acquisition.
A bidder may initiate a hostile takeover through a tender offer, which means that the bidder proposes to purchase the target company's stock at a fixed price above the current market price. Another method of hostile takeover is acquiring a majority interest in the stock of the company on the open market. If that is impossible or just too expensive, a bidder may initiate a proxy fight, which means that the bidder persuades enough shareholders to replace the management of the company with one which will approve the acquisition.
Why Hostile Takeovers Matter
Most acquisitions and mergers occur in the business world by mutual agreement -- both sides agree that all of the shareholders' interests are served best by the transaction. In those instances, both sides have a chance to evaluate the costs and benefits, assets and liabilities, and proceed with full knowledge of the risks and returns.
However, in a hostile takeover, because the management and board of the target company resist the acquisition, they usually do not share any information that is not already publicly available. As a result, the acquiring firm takes a risk and may unwittingly acquire debts or serious technical problems.
In addition, the loss of key managers and leadership within the company may cause a shakeup within the target company that may disrupt its operations and threaten its viability.