The Hostile Takeover

Hostile Takeovers: The Power of the Shareholders

John Dunn Corporate Finance Professor Gohary February 20, 2014

The Hostile Takeover Hostile Takeovers: The Power of the Shareholders

Upon hearing the words hostile takeover it is not unfathomable to have images or a military takeover, a violent fight or struggle, or some other negative conflict. Despite the name however, hostile takeovers are generally beneficial to the firms that it involves and are done, for the most part, for the good of those with a vested interest. It is very important to understand what exactly hostile takeovers are and to do that this paper will explore the following: What is a hostile takeover and how do they occur? If the takeover is beneficial why is it considered hostile? The case of Charter and Time Warner Cable Can a company protect against a hostile takeover? Having a full understanding of what a hostile takeover involves will allow us to see why a takeover may be the best option a firm has or why shareholders should resist such a takeover. What is a hostile takeover and how do they occur? According to our text Corporate Finance, a hostile takeover is a situation in which an individual or organization, sometimes referred to as a corporate raider, purchases a large fraction of a target corporations stock and in doing so gets enough votes to replace the targets board of directors and its CEO. (Berk & DeMarzo, 2011) In essence, a hostile takeover is a tactic that is available to ensure that corporate managers act with the interests of shareholders in mind. The very threat that their jobs can be lost due to poor performance is a very powerful weapon to make sure managers make the correct decisions. When a company underperforms, the price of its stocks can drop dramatically which provides great opportunity for someone who is looking to get the company back on track while making a profit at the same time. An individual or group can, due to the low price, buy enough

The Hostile Takeover

shares of the company to have the power to replace the board and CEO which makes the company and its stock value much stronger. If the Takeover is Beneficial Why is it Considered Hostile? Considering the fact that hostile takeovers usually occur for the good of the company, why are they referred to as hostile? In the case of a hostile takeover, the board of directors and management is often seen as the problem plaguing the company and are bypassed by the firm looking to do the takeover. This process can create great animosity within and surrounding the company and can also create great risk for those acquiring the company. Due to the fact that the board of directors and management are not willing participants in the takeover, they very well may try to conceal information, financial reports, funds, debts, or other issues that may affect those who will now be in command. Not all takeovers however are hostile and some can provide a mutual benefit. Takeovers that are welcome by both parties and can provide a benefit for all involved are much more common than hostile takeovers. These takeovers are considered friendly. In a friendly takeover, the company that would like to acquire another communicates with the company that it is interested in and make an offer to the board. The board may see the offer as a way to grow stronger or get out of tough circumstances and therefore accept the takeover. If however the board of directors does not accept the offer and the firm wishing to perform the takeover proceeds regardless, the takeover is then considered hostile. (McMahon & Harris, 2014) The Case of Charter and Time Warner Cable Charter Communications is actively seeking to take over the Time Warner Cable Company. As of February 11, 2014 Charter has begun a hostile takeover attempt and are forming a team of directors in an attempt to force the TWC board to accept an offer that they had

The Hostile Takeover

previously voted against. Charter knows that if during the upcoming election they are able to get their own people on the board, TWC would be just about forced to accept their buyout offer. (Kastrenakes, 2014) The path to a takeover has not been as smooth as Charter would have liked it to have been and they are now speaking TWCs shareholders in an effort to get their votes. These votes, if they go the way that Charter has planned, will effectively bypass the TWC board, and seal the takeover. The benefit for this type of takeover is that it gives the shareholders some say in a company that they invested time and money in. Without the possibility of a hostile takeover, TWCs board of directors could easily make all of the decisions that they find appealing and only take offers from companies that benefit them. The ability to essentially vote for a takeover gives the shareholder the ability to say, This is not where we envisioned our company going and it is time for change! Can a Company Protect Against a Hostile Takeover? Boards of Directors of companies are not totally defenseless to hostile takeovers and can take some proactive measures. J.C. Penny is a great example of a company with a board that is looking to protect itself. According to Fox Business, J.C. Penny is planning a so called poison pill. According to JCP, this plan will protect against a future attack and would be activated any time a 10% or greater share of the company was purchased. The so called poison pill would automatically dilute the holdings of such an investor buying shares greater than that 10%. The board stressed that this was not in response to any takeover attempt that that had already occurred. (Egan, 2013) Action such as this poison pill can be taken and often is especially by directors who are in a position where a takeover is possible. There are a number of different protective measures that

The Hostile Takeover

can be used such as a people pill where high-level managers threaten to leave if the company is acquired, a golden parachute that allows the CEO and management a bonus if the company is acquired making it a costly transaction, and a supermajority that requires a 70 to 80 percent approval by shareholders.(Grabianowski) The important thing to remember however is that there is always a way around such measures and ultimately the power is in the hands of the shareholders. The Power Shifter There are a number of key takeaways from a discussion regarding a hostile takeover. Most notably perhaps is the shift in power. Many would assume that the power within an organization lies with the decision makers. The possibility of a hostile takeover however ensures that the true power is given to the shareholders and in order to prevent a possible takeover the board must produce the results that shareholders desire. Next, while a hostile takeover is generally very good the organization being acquired due to the fact that often times the acquiring firm is paying a premium, analysts believe that a hostile takeover can have a negative effect on the economy because many takeovers fail and crate growth slowing debt. In addition, a the threat of a hostile takeover while beneficial to

shareholders may bring about additional debt to an organization because like J.C. Penny they feel they need to have protective defense strategies in place. The mere fear of a takeover can cripple an organization due to constraints that it puts on growth and innovation.

(money.howstuffworks.com) When considering hostile takeovers there is no one size fits all approach. Each group of shareholders needs to make the analysis based on their own company and what benefits or downfalls they may see. As the saying goes, sometimes the grass is not always greener on the

The Hostile Takeover

other side, but if the company is being led in the wrong direction it is a very powerful tool to have available.

The Hostile Takeover References

Berk, J. B., & DeMarzo, P. M. (2011). Corporate finance (2nd ed.). Boston, MA: Prentice Hall.

Egan, M. (2013, August 22). FoxBusiness. J.C. Penney Creates Poison Pill to Protect Against Hostile Takeover. Retrieved February 19, 2014, from http://www.foxbusiness.com/industries/2013/08/22/jcp-takes-step-to-ward-off-coercivetakeover/ Grabianowski, E. (n.d.). How Hostile Takeovers Work. HowStuffWorks. Retrieved February 18, 2014, from http://money.howstuffworks.com/hostile-takeover4.htm Kastrenakes, J. (2014, February 11). Charter wants to take over Time Warner Cable's board to speed up buyout. The Verge. Retrieved February 18, 2014, from http://www.theverge.com/2014/2/11/5400874/time-warner-cable-board-hostile-takeoverattempt-charter McMahon, M., & Harris, B. (2014, January 30). What is a Hostile Takeover?. WiseGeek. Retrieved February 20, 2014, from http://www.wisegeek.com/what-is-a-hostiletakeover.htm