Hostile Takeovers: What are they and how do they work?
Unless you live under a rock, you are probably aware that Elon Musk is attempting a hostile takeover of Twitter. And yes, it sounds exactly like it reads, he is trying to force the owners (read shareholders) of Twitter to sell the company to him against their will.
But what exactly is a hostile takeover, why does Elon Musk want Twitter so badly and is he likely to get it?
I’ll answer these questions below as simply as possible for you.
What is a hostile takeover?
The term hostile takeover refers to the acquisition of one company by another corporation against the wishes of the former.
Simply put, a hostile takeover occurs when a company or businessperson (the acquirer) tries to buy another company (the target) against the wishes of its management or the board.
One of the most common ways for business owners to raise money is to sell shares of their company to other people usually known as investors. I go into much more detail about startup financing here and how business owners raise money for their businesses.
As long as you don’t own all the shares of your business, you are open to a hostile takeover, and the more of the company you have sold, the more open you are to a hostile takeover attempt.
How do hostile takeovers work?
There are multiple ways that the acquirer might attempt the hostile takeover, but here are a few;
- Issuing a tender offer
- Proxy fight
- Creeping tender offer
Issuing a tender offer
This is an announcement by the acquirer that they are willing to buy the company at a certain (usually very high) price. This offer is made over the head of the board directly to the shareholders and the aim is to spur the shareholders to bring immense pressure on the board thereby forcing them to sell.
Remember that the shareholders as a group, are the real owners of the company, the board is only a manager and technically, has to do what the majority of shareholders want.
In the case of Twitter and Elon Musk, Elon has publicly made an offer of $54.20 per share to the shareholders of Twitter, valuing the company at $47 Billion, a 38% premium over the companies closing share price the day before it was announced that Musk had acquired 9% of Twitter.
This is the more common type of takeover bid you see in movies and literature because of the inherent drama.
In a proxy fight, the acquirer tries to convince the largest shareholders to give their proxy to them, so they can use it to vote for acquisition in an upcoming shareholders’ meeting.
If the acquirer is successful in getting enough proxies, they can simply vote to approve the sale.
In May 2008, Carl Icahn launched an effort to replace Yahoo’s board of directors through a proxy fight because they refused an offer by Microsoft to buy the company at $31 per share. He believed the board was no longer acting in the best interest of the shareholders.
The fight ended up in a compromise where Icahn and 2 of his nominees were appointed to the board in exchange for the end of the battle.
Creeping tender offer
In a creeping tender offer, the acquirer attempts to buy as many shares as they can on the open market. There is speculation that this is how Elon Musk was able to acquire 9% of Twitter in the first place.
This is more common for public companies as they are more likely to have shares belonging to people with no emotional attachment to the company and are more willing to just sell to the highest bidder.
Defending Against A Hostile Takeover
The Target company is far from defenceless and there are multiple actions the target can take to protect itself from an unwanted takeover bid.
- Poison pill defence
- Crown jewel defence
- Pac-man defence
- People poison pill
Poison Pill defence
Or is it is more formally known; The shareholder rights plan is the most common defence targets employ to protect themselves from a hostile takeover attempt.
It allows existing shareholders to buy new shares of the company at a discount if one shareholder buys above a certain amount of stock in the company.
Usually, the acquirer is excluded from being able to benefit from this discount and what this does is dilute the ownership stake of the acquirer, reducing the amount of leverage they have in this takeover attempt.
For example, the fictional company Startrust Inc has 10,000,000 shares and each share costs $20 valuing the company at $200,000,000. A new investor acquires 900,000 shares of the company which gives him a 9% stake in the company, making him the largest single shareholder in the company.
He initiates a hostile takeover through a tender offer, offering the shareholders $30 per share to sell all their shares to him, but the board rejects this offer.
And In order to further forestall the takeover attempt, the board adopts a poison pill that states that if any single shareholder acquires up to 15% of the company, it triggers a new Shareholder Rights Plan that allows any other shareholder excluding the initial single shareholder to buy newly created stock of the company at a 50% discount for each share of the company stock that they already own.
So 5 million new shares are created, increasing the number of shares in the company to 15 million which reduces the initial investor stake in the company from 9% to 6%. The other shareholders can now snap up all of the new shares that have been created which gives them even more leverage.
While this is a wholly fictional scenario, this is the exact defence that Twitter’s board has adopted during this hostile takeover attempt by Elon Musk.
Crown Jewel Defence
In this scenario, the company will sell off its best assets in order to make it a less attractive target for a takeover. This sale is usually to a friendly 3rd party who will agree to sell it back after the takeover attempt has been quelled.
For example, Twitter could sell the rights to their algorithm and data, which some argue is the most valuable asset of the company.
This is where the target begins to also aggressively acquire shares in the acquirer in an attempt to either scare off the attempt or even acquire them and through that put an end to the acquisition attempt.
People Poison Pill
This is where key personnel agree to all resign if the company is ever the subject of a successful hostile takeover.
The idea is that the acquirer won’t be interested in the chaos that would ensue if the key personnel quit en masse.
At this point, you might be wondering why would someone want to execute a hostile takeover seeing as it looks like a lot of trouble for what its worth.
There are 2 major reasons why a takeover might be attempted;
- Shareholder dissatisfaction with management or the board of directors and the direction in which they are leading the company (This is what Elon Musk cites as his reason for wanting to execute the takeover)
- Access to company assets including patents, routes, trade secrets, cashflow, etc (This is what most people think is behind Musk’s takeover attempt)
Apart from all the downsides of attempting a hostile takeover, one major downside of acquiring a company in this way is the lack of visibility into company affairs.
During a friendly takeover, the target company will open its books for the acquirer to have a look into. The target will also give full transparency, allowing the acquirer to know exactly what they are getting.
In a hostile takeover, the acquirer only has access to publicly available information so they might be buying a faulty bill of goods.
So that’s it. Hostile takeovers in a nutshell and how companies protect themselves from takeover attempts. I hope this has been helpful.
If you would like to learn more about building or working in the African startup ecosystem, subscribe to my newsletter here