Hostile Bid

Key Takeaways

• Hostile bids bypass management and go directly to shareholders with takeover offers.
• A proxy battle may occur if bidders try to replace management.
• Bidders typically offer a significant premium to entice shareholders.
• A friendly bid is accepted by management, unlike a hostile bid.
• Hostile bids can significantly alter company structures and dynamics.

What Is a Hostile Bid?

A hostile bid is a takeover strategy where the acquirer bypasses the target company's management and appeals directly to its shareholders. Bidders generally present their hostile bids through a tender offer. The acquiring company offers to purchase the common shares of the target at a substantial premium in this scenario. Activist investor Carl Ichan made numerous hostile bids for Clorox in 2011.

We'll explain how hostile bids work and their potential implications, such as proxy battles.

The Dynamics and Implications of Hostile Bids

Hostile bids can lead to major changes in the organizational structure. If a board pursues defensive action to stop the merger, a proxy fight can occur. In this scenario, the acquirer will often attempt to convince the target shareholders to replace management. Certain investors, such as activist investors, are known for using hostile bids to force takeovers and buyouts. For example, activist investor Carl Ichan made several hostile bids for Clorox in 2011.12

How Shareholder Solicitation Influences Hostile Bids

The acquirer and the target company use a variety of solicitation methods to influence shareholder votes. Shareholders receive a Schedule 14A with financial and other information on the target company and the terms of the proposed acquisition. In many cases, the acquiring company hires an outside proxy solicitation firm that compiles a list of shareholders and contacts them to state the acquirer's case.

The firm can call or provide written information, detailing the reasons the acquirer is attempting to make fundamental changes and why the deal could create more shareholder wealth in the long term.

Individual shareholders or stock brokerages submit their votes to the entity assigned to aggregate the information (e.g., a stock transfer agent or brokerage). The corporate secretary of the target company receives all votes before the shareholders' meeting. Proxy solicitors may scrutinize and challenge the votes if they are unclear.3

Comparing Hostile and Friendly Bids

Unlike a hostile bid, a friendly bid is approved by management. An offer that's accepted by management and the board of directors is considered a friendly bid, as things are amicable. In this case, the acquiring company generally has more access to the company and relevant information. On the flip side, a company undertaking a hostile takeover may have to do so with little internal information about the company as the management has been unwelcoming.

Example of a Hostile Bid

In October 2010, French pharmaceutical company Sanofi-Aventis offered shareholders of U.S. biotech company Genzyme $69 a share after being rebuffed multiple times by Genzyme management.4 Simultaneously, Sanofi CEO Chris Viehbacher sent Genzyme chief executive Henri Termeer a letter in which he claimed to have the support of Genzyme shareholders possessing more than 50% of outstanding shares.5

Shareholders were given until December 2010 to accept Sanofi's offer. As many analysts predicted, the majority of shareholders considered Sanofi's offer low and the bid was unsuccessful.

A deal was finally approved by Genzyme's board of directors in February 2011, when the company agreed to a price of $74 a share plus contingent value rights tied to the performance of Genzyme's experimental multiple sclerosis drug Lemtrada.6