What Happens to the Target Company's Shares in a Hostile Takeover?

The target company in a hostile takeover bid typically experiences an increase in the price of its shares. A hostile takeover is when an acquiring company makes an offer to the target company's shareholders, but the board of directors of the target company does not approve of the takeover. Concurrently, the acquirer usually engages in tactics to replace the management or board of directors at the target company.

Understanding How Hostile Takeovers Impact Shares

Hostile takeovers typically occur among publicly-traded companies where the owners are shareholders represented by a board of directors. A hostile takeover can occur for a few reasons. The two companies might have failed to reach a merger agreement, or the target company decided to not go forward with the merger. 

Also, a group of investors might believe the management of the company is not fully maximizing shareholder value. Also, the investors might make a case for a new management team. The acquirer can also be a company. Public companies can acquire a target company through the shareholders even if management doesn't want the takeover.

The result is the use of hostile tactics to acquire the target company by the investors or acquiring company. The goal of the takeover by the acquirer is to achieve at least 51% ownership in the target company's stock. The strategies used in a hostile takeover can create additional demand for shares while creating an acrimonious battle for control of the target company.

Tender Offer

Acquiring companies can you use a strategy called a tender offer to purchase the shares of the target company. A tender offer is a bid to purchase the stock shares of the target company at a premium to the market price of the stock. In other words, an acquiring company might bid $50 per share for the target company when its shares are trading at $35 per share. As a result, a tender offer can lead to a significant increase in the stock price for the target company.

The reason the acquiring company makes an offer at a premium to the current stock price is to entice the existing shareholders of the target company to sell their shares and allow the acquiring company to own the majority stake. The tender offer is typically conditional on the acquiring company obtaining controlling interest in the target company. In other words, if the acquirer can't entice enough shareholders to sell their shares, the bid to buy the company is withdrawn.

Proxy Vote

A proxy vote is another hostile takeover strategy whereby the acquiring company attempts to convince existing shareholders of the target company to vote out their executive management and board of directors. The acquiring company would then replace the necessary management team and board members with people who are open to the idea of the takeover and will vote to approve it.

Special Considerations

Hostile takeovers, even if unsuccessful, typically lead management to make shareholder-friendly proposals as an incentive for shareholders to reject the takeover bid.

These proposals include special dividends, dividend increases, share buybacks, and spinoffs. All of these measures drive up the price of the stock in the short-term and longer-term. Dividends are typically cash payments made to shareholders by the company. Special dividends are one-time payouts to shareholders. Dividend hikes are bullish catalysts, making the stock more attractive, especially in low-rate environments.

Share buybacks create a steady bid for the stocks and reduce the supply of stock. Spinoffs are strategic decisions to divest non-core business units to create higher valuations and provide a more focused vision and business for shareholders.

It's important to note that hostile takeovers are usually a referendum on the target company's management. Shareholders must weigh their faith in management's long-term vision against the potential for quick profits.

Real-World Example of a Hostile Takeover

RJR Nabisco’s buyout is one of the largest and most controversial hostile takeovers in U.S. history. RJR Nabisco Inc. was a tobacco and food company and was eventually purchased for $25 billion by the investment firm; Kohlberg Kravis Roberts & Co in the late 1980s.

RJR managers had also presented bids in an effort to thwart the hostile takeover from Kohlberg Kravis. The initial bid from the management team began at $75 per share. Over the course of a few days of intense bidding, Kohlberg Kravis won the bid with $109 a share.

In other words, the winning bid was a 45% increase in the stock's price from the initial $75 bid from RJR's managers. The intense, contentious bidding war was chronicled in the book (and movie) titled the Barbarians at the Gate.