What is a Hostile Takeover Bid?
A hostile takeover bid is a type of acquisition or merger offer that is made against the wishes of the board (and usually management) of the target company.
How Does a Hostile Takeover Bid Work?
In a hostile takeover bid situation, the target company's board of directors rejects the offer, but the bidder continues to pursue the acquisition.
A hostile bidder often makes its bid via a tender offer, which means that the bidder goes right to the shareholders (rather than to the board) and proposes to purchase the target company's stock at a fixed price above the current market price. Another method of hostile bidding 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 that will approve the acquisition.
Why Does a Hostile Takeover Bid Matter?
Most acquisitions and mergers occur in the business world by mutual agreement -- both sides agree that all of the shareholder's 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, when a hostile takeover bid arrives, 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 shake-up within the target company that may disrupt its operations and threaten its viability.