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While proponents argue that hostile takeovers serve an important corporate governance function that helps maximize shareholder value, critics emphasize their potentially damaging effect to such stakeholders as workers, the local community, and managers of the target firm.Within the United States, hostile takeovers are most frequently attempted through a financial and legal mechanism known as a tender offer (i.e., a public solicitation to purchase shares of the target company at a fixed price, within a given time period, and usually contingent upon shareholders tendering sufficient shares for the bidder to gain control of the firm).Such purchases enable the raider to minimize the cost of a successful acquisition, and to sell these shares (often at a significant profit) if the hostile takeover attempt is not completed.
According to his theoretical premise of a market for corporate control, stock prices are not only efficient but they also provide a critical indicator of managerial effectiveness.
When a company’s share price falls relative to the overall market, it signals that the firm’s managers are underperforming.
Another popular anti-takeover practice involves amending the corporate charter so that a “supermajority” of shareholders (often two-thirds or more) is needed to approve major strategic changes, including mergers.
All of the anti-takeover practices highlighted above face rigorous opposition by shareholder rights activists.
Somewhat less controversially, a firm may include a provision in its charter that authorizes its directors to consider the well-being of stakeholders other than just shareholders when evaluating major strategic decisions.
Once a hostile bid has been announced, the target firm may take on additional debt or sell off a valuable asset (“the crown jewels”) to make itself less attractive.More than virtually any other corporate activity, hostile takeovers bring about abrupt and dramatic changes to a firm’s strategy, structure, and leadership.Hostile takeovers have remained a highly controversial practice since their inception in the United States during the early 1950s.The target firm might also enlist a third party “white knight” to acquire sufficient shares to block the hostile takeover, or to initiate a friendly acquisition.Many target firms begin to pursue the types of practices most commonly associated with hostile acquirers, such as laying off workers, outsourcing, rationalizing operations through facility closures, and refocusing on core markets.Since the acquirer must disclose the purpose for the share purchase within Schedule 13D, the filing of this report often marks the beginning of the takeover battle.With the extensive reporting requirements defined by federal law, particularly the Securities Exchange (1934) and Williams (1968) Acts, it would be very difficult in the United States for a party, or group of parties acting together, to gain control of a company solely by accumulating shares gradually in the open market (a practice known as a “creeping tender offer”).Target firms will also commonly lobby governmental regulators and legislators to oppose the acquisition.The use of hostile takeovers as a means for achieving good corporate governance was originally outlined by Henry Manne in 1965.Raiders may also initiate a proxy contest, an attempt to convince target firm shareholders to replace existing board members with a new group that will approve the acquisition.While tender offers and proxy contests can be used in tandem, they are often regarded as alternative mechanisms for accomplishing hostile takeovers.