What is a Hostile Takeover?

Submitted by Marco on 24 June, 2008 - 20:54

We hear that companies have begun hostile takeover proceedings - but what does it really mean? Here we will learn what is a hostile takeover?

A hostile takeover is a takeover which is against the wishes of the target company's board of directors - where the board had rejected the initial offer. A takeover is also considered hostile if the acquirer or the bidder makes an offer without informing the board about their intentions. A hostile takeover is the opposite to a friendly takeover where the joining is seen as beneficial and both companies work together in merging two companies together.

An acquiring company who wants to bid or takeover another company typically approaches the target company's board to present them with their offer. The board members can accept or reject the offer after consideration. If the acquiring company continues to pursue the prospect of takeover after rejection or bypasses the board, it then turns into a hostile takeover. Publicly listed companies are at risk from hostile takeovers since acquiring companies can buy up large amounts of the target company's stock to gain a controlling share.

The acquiring company is taking a risk by attempting a hostile takeover. Because the target company's board of directors aren't on board or cooperating, the consequence is that the acquirer or bidder cannot conduct their due diligence about the financial affairs of the target company. The books won't be provided to the acquirer and they will be blind as to the company's financial numbers or any financial problems the company may have.

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