HOSTILE TAKEOVER

What is Hostile Takeover?

The acquisition of one company (called the target company) by another (called the acquirer) that is accomplished not by coming to an agreement with the target company's management, but by going directly to the companys shareholders or fighting to replace management in order to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight. A "hostile takeover" allows a suitor to take over a target company whose management is unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer directly after having announced its firm intention to make an offer.

Why Hostile Takeover?

There are several reasons why a company might want or need a hostile takeover. They may think the target company can generate more profit in the future than the selling price. If a company can make $100 million in profits each year, then buying the company for $200 million makes sense. That's why so many corporations have subsidiaries that don't have anything in common -- they were bought purely for financial reasons. Currently, strategic mergers and acquisitions are more common. In a strategic acquisition, the buyer acquires the target company because it wants access to its distribution channels, customer base, brand name, or technology.

How Hostile Takeover is conducted?

A hostile takeover can be conducted in several ways. A tender offer can be made where the acquiring company makes a public offer at a fixed price above the current market price. An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple majority, to replace the management with a new one which will approve the takeover. Another method involves quietly purchasing enough stock on the open market, known as a "creeping tender offer", to effect a change in management. In all of these ways, management resists the acquisition, but it is carried out anyway. A tender offer is a public bid for a large chunk of the target's stock at a fixed price, usually higher than the current market value of the stock. The purchaser uses a premium price to encourage the shareholders to sell their shares. The offer has a time limit, and it may have other provisions that the target company must abide by if shareholders accept the offer. The bidding company must disclose their plans for the target company and file the proper documents with the Securities and Exchange Commission (SEC). The 1966 Williams Act put restrictions and provisions on tender offers. In a proxy fight, the buyer doesn't attempt to buy stock. Instead, they try to convince the shareholders to vote out current management or the current board of directors in favor of a team that will approve the takeover. The term "proxy" refers to the shareholders' ability to let someone else make their vote for them -- the buyer votes for the new board by proxy. Often, a proxy fight originates within the company itself. A group of disgruntled shareholders or even managers might seek a change in ownership, so they try to convince other shareholders to band together. The proxy fight is popular because it bypasses many of the defenses that companies put into place to prevent takeovers. Most of those defenses are designed to prevent takeover by purchase of a controlling interest of stock, which the proxy fight sidesteps by changing the opinions of the people who already own it.

Examples of Hostile Takeovers

The most famous recent proxy fight was Hewlett-Packard's takeover of Compaq. The deal was valued at $25 billion, but Hewlett-Packard

reportedly spent huge sums on advertising to sway shareholders. HP wasn't fighting Compaq -- they were fighting a group of investors that included founding members of the company who opposed the merge. About 51 percent of shareholders voted in favor of the merger. Despite attempts to halt the deal on legal grounds, it went as planned.

Example of Adamjee Insurance

The largest hostile takeover bid in the history of Pakistan took place when a major Pakistani bank with over 900 branches, the Muslim Commercial Bank, took over Pakistan's largest private insurer, Adamjee Insurance, at an annual general meeting on May 29 2004. The Mansha group is arguably the country's largest conglomerate with interests in cement, textiles and banking, with MCB being its flagship. For the past some years, the group had set its sights on Adamjee Insurance, the largest insurance company in Pakistan commanding nearly 40 per cent share in the total non-life insurance business in the country. The company held Rs1.5 billion in equity and Rs7 billion in total assets. The annual shareholders' meeting of Adamjee Insurance was held on May 29 2004, after a 16-month-old stay against the holding of the meeting was set aside by the Supreme Court of Pakistan on March 15, 2004. Six seats on the nine-member board of directors were secured by the Mansha group at the end of four-hour long shareholders' meeting and counting of votes. The Adamjees retained three. Four of the 19 contestants withdrew their names before the elections. The fact that among them was the company's chairman, Mohammad Hanif Adamjee, signalled that the owners had given up hope even before the votes were cast. Just before the race began on 29th May, the Mansha group was officially in possession of 38.5 per cent shares in Adamjee Insurance comprising 29.5 per cent stake by the group-controlled Muslim Commercial Bank and 9 per cent owned indirectly: 4 per cent through MCB Employees Provident Fund and 5 per cent by MCB Employees Pension Fund. But punters believe that the group had accumulated another 8 per cent of the 20 million floating stock from the market. With about 46 per cent shares already in their pocket, the corporate raiders had only to gather 5 per cent 'proxies' from the 30 per cent stock held by individuals.