Banker Blog #5 Hostile takeover mahahaha

Even the name sounds sinister, a hostile takeover. What better way to kick off the holiday weekend than one of the most controversial topics in business? There is plenty of sunshine and happiness to go around, lets delve into this for ten minutes.

What is a hostile takeover though? In films it seems to amount to something illegal, some heavies coming round to see you in the night. As always when it comes to the business world, the films get it wrong.

You remember in the last blog we explained how management run a company for the shareholders who own it, vote on major decisions and want increased profits? Keep that in mind when we explore this hypothetical situation.

Lets play some war games where you consider how you would act.

***

You want to buy a rival company that has been standing in your way for too long. This town isn’t big enough for the two of you and it is time to take action.

You approach management and the CEO, explaining you want to buy the company. They are not keen to sell though and tell the shareholders it would be a mistake. Listening to their own management, the shareholders decide not to sell, the company’s best years are still ahead.

Damn! You don’t need this thorn in your side.

If the nice way won’t work, time for a hostile takeover.

You approach individual shareholders, offering them ten times what the stock is worth. They see dollar signs and sell. You do it discreetly, maybe even using intermediaries, by the time management see what is happening, you own 51% of the stock, that’s 51% of the votes.

What happens next is up to you. You can have the company vote to dissolve itself, ending the threat. You can merge it with your business. You can allow it to exist as an independent brand but one you control.

Checkmate, you win.

Now lets flip it!

You are running a company, minding your own business and some insufferable twerp tries to buy it! Grrr. The shareholders are worried and want to know how to defend against these machinations.

  • Urge the stockholders not to sell. This is naive though, everyone has their price, you can’t just wait and hope, so a hardnosed leader like you will take action.
  • Golden parachute- you set the condition that if the company is ever purchased, all the leading executives (like you) by law must get huge pay outs. This makes the idea of taking over your company unappealing.
  • Pacman defence- I love the name of this one. You know when the ghosts are chasing pacman and you get the power ball, they turn blue and then you gobble them up? I think of when Mr Burns discovered that in the Simpsons when introduced to the game, “now the hunter has become the hunted!” This company trying to buy you? You turn around and try and takeover it! Brilliant, you carry out a hostile takeover on the company trying to buy you, approaching their shareholders. An example of the best defence is a good offence.
  • Crown Jewel- this defence means you add a clause of the company is taken over, you need to sell all the valuable assets of the company. So if you are a taxi company, a crown jewel defence would involve the clause in your company constitution that if a rival buys you, the fleet of cars will be automatically sold.

 

There are more nuanced takeover methods, more ways to prevent it but as always, the point of this blog is to give you a fundamental understanding.

Hope that was useful, go enjoy the sun and holiday.

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