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Hostile Takeovers


wealthymatters.comWHAT IS A HOSTILE TAKEOVER? WHY IS IT CALLED SO?
The acquisition of a company by another by directly approaching the  company’s shareholders and not reaching an agreement with the management of the target company is called a hostile takeover or a forced takeover bid. Many a time, the acquirer will try to replace the target company management or tender an offer to get a takeover done. The key characteristic of a hostile takeover is that the target co’s management doesn’t want the deal to go through.
HOW IS IT DIFFERENT FROM A NORMAL TAKEOVER OR ACQUISITION?
In a normal takeover or acquisition, the buyer as well as the seller reaches an agreement on the pricing, the sale and the nature of the merged entity. But in a hostile takeover, the management of the company does not support the unsolicited offer and reject it. In such a case, the offer is made against the will of the management to the shareholders by the acquirer based on which a decision is taken. 
WHAT ARE THE BENEFITS OF A HOSTILE TAKEOVER? 
The acquirer might be attracted to the target company because of its assets, technology and distribution strength and would want to add it to its existing business. The shareholders of the target company may get a premium to the prevailing stock price. While the acquirer may end up paying more for the company by directly making an offer to the shareholders against the will of the management, there have been cases where hostile takeovers have been beneficial for both the companies. In most cases, hostile takeovers have destroyed value.
HOW DOES THE MANAGEMENT OF THE TARGET CO PREVENT A HOSTILE TAKEOVER?
 The Golden Parachute is a provision in a CEO contract  which provides that s/he will get huge cash or bonus payout if the company is acquired. This makes the acquisition more expensive, and less attractive. A staggered board of directors drags out the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered, so that some members are elected every two years, while others are elected every four. Many companies interested in making an acquisition don’t want to wait four years for the board to turn over. One of the more common defenses is the poison pill. A poison pill can take many forms, but it basically refers to anything the target company does to make itself less valuable or less desirable as an acquisition. 
ARE THERE INSTANCES OF HOSTILE TAKEOVERS IN INDIA?    

In India, the  Reserve Bank of India does not allow acquisition financing and leveraged buyouts making a hostile takeover difficult. Additionally, hostile takeovers don’t go down well with the political corridors and financial institutions in India. UK-based NRI businessman, Swaraj Paul made a hostile bid for Indian companies Escorts and DCM Shriram, Reliance Industries bid to take control of L&T, Global tobacco maker BAT tried to acquire ITC and the most recent one being ABG Shipyard and Bharati Shipyard’s hostile bid for Great Offshore. With the new takeover guidelines that have been announced, it has become extremely expensive for hostile takeovers to succeed.


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About Keerthika Singaravel
Engineer,Investor,Businessperson

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