With the paradigm shift in the contemporary environment in which businesses operate, companies are faced with several challenges, one of them being hostile takeovers. There are a number of reasons for these captures. Thus some company managers decide to give out dividends for fear that the company could be a very trouble-free bait for takeover if the balance sheet reveals presence of too much cash. In the very simple terms of the word, a takeover just implies the acquisition through purchase of shareholding of a corporation or a public company top get a controlling interest of the captured corporation or quoted company best called acquiree.
A business might opt to buy another business for several reasons. First of all, high and regular profitability of the target business is one driving force. The target corporation may be having the advantage of manufacturing and or distribution capabilities. Another important point is the threat of competition which makes the acquiring company to buy up the competition of the other business.
This way, the acquiring entity will have a monopolistic characteristic in the market, for example attempts of Google to buy Yahoo and Microsoft.
A third reason is to do with expansion revenue base of the acquiring company. Here large corporations purchase smaller companies to boost their revenue base the profit of the smaller company notwithstanding. Takeovers take three basic forms- it could be hostile, friendly or a reverse takeover. A reverse takeover is a case where a smaller company acquires the bigger one or where a private company buys up a public one.
In a friendly takeover the target company accepts the attempt to be bought up by negotiating terms.
These two aside, a company may decide or attempt to acquire control of another whether the one to be acquired wants or otherwise. This hostile takeover Resistance of captures by the management arises from the fear of dilution of powers while others would resist for security reasons. Fear of loss of job security or even dismissal from work position is also a well considered factor when management resists capture. Current Hostile takeover attempt Case study: Hart InterCivic Inc. and Sequoia Voting Systems Inc. Overview
Hart InterCivic Inc and Sequoia Systems Inc are two strong e-voting competitors in the market both located in the US. In early April, this year (2008) Sequoia Voting Systems Inc. engaged bouts of attempts to circumvent an imminent hostile takeover its competitor in electronic voting; Hart InterCivic Inc. The flurry attempts led to a series of legal moves involving attorneys. Hart had threatened to take over Sequoia and it gave a 60 days notice to the management and shareholders to match the offer notifying them of the intention to purchase a $2 million note held by another company, Smartmatic Corporation.
Reasons for Attempts of Capture From the outset we have seen that the two companies are strong competitors in the electronic voting industry. Their geographical location is also of centric importance. The best way for Hart to curb rivalry in business is to acquire the other business thus forming a monopoly. The threats of hostile acquisition by Hart caused a stir and panic within the management team of Sequoia. Being worried of power dilution, probably loss of positions, change of centers to be reporting to, the management at Sequoia rushed to secure a legal redress. This failed despondently.
Another issue about hostile capture is that when there are only a few rivals in the market and there are those charging a price which according to one of the more powerful firm undervalues the already established corporation the powerful corporation will threaten to acquire the smaller company which is supposedly undermining the value of the industry. Through this acquisition there will be an overhaul of the management of the target company immediately after the corporation has taken over the business and control. It is this loss of managerial control that the directors and management of the smaller firm will resist.
Major strategies taken by managers of the company Sequoia, in bid to confound Hart’s maneuvers, filed multiple motions through its lawyers against the raiders. However, their efforts have not been fruitful as such. Alternatively, directors of the target may thwart the takeover by use of any or a combination of the following strategies: ? They may at first advice the shareholders against the takeover ? Through the use of poison pills, which rely on setting up of destruction-geared mechanisms that make the takeover more expensive.
Such gadgets include: – issuance of convertibles with prices below par value or exercise prices of the market, instigating sharing of options between the employees and the directors and making agreements with clients or customers including compensation incase of takeover. ? Finding a bidder (white knight) whom they prefer to stand for them in the bidding exercise ? They can issue new shares to increase the target’s market capitalization thus gaining more power against the threat of hostile acquisition
Even if the directors be opposed to the hostile takeover which results in hostile bids, the very occurrence of these hostile bids reveals a grave conflict of interest between directors and shareholders. A chance is offered to the shareholders for their share to be sold are offered a chance to sell their shares, usually at substantially above the market price prior to the bid. Directors stand to lose their jobs. Directors should not recommend a bid but for a better offer or a chance of getting one and in addition they have to ensure that the market situation shows clearly that their company is for sure undervalued to recommend it.
Among the financial economists, one school of thought contends that hostile takeovers are significantly important in replacing incompetent though well embedded management since rarely will shareholders vote out incumbent management even under circumstance of underperformance by the directors. Major issues and strategies being followed by the raiders The raider company employs a number of tactics to win over its attempted takeover. Large businesses acquiring smaller ones in most cases will propose a higher price of shares of the target and this is basically meant to win the goodwill and support of the shareholders.
On the same side of the divide the raider may decide to proxy fight as a weapon against chances of its attempts failing. In this case, proxy fight involves the creation of conflict within the target company between the management and the owners (shareholders) of the targeted business. This kind of tactic was used by HP (Hewlett’s Packard) in acquisition of Compaq in 2002, – (A Fight to the Finish- http://www. news. com/2009-1001-852197. html) Strategy taken to resist capture
Sequoia Incorporation employed a legal move going through the Attorney in order to resist the takeover threat by Hart Inc. However, it is not always that the strategy employed will sail through. For example in our case Sequoia lost the bid and Hart went ahead to capture it. Even in the previously mentioned case between Hewlett Packard and Compaq; when HP announced that it was going to acquire Compaq claiming that Compaq’s shareholders had approved it all, the maneuvers made by Compaq to seek legal redress did not work to its favor.
HP won the bid. Management boards in their endeavor to brandish a tirade of protection against captures, they resort to methods which will seem to be increasing the shareholders’ net worth especially when they feel that their company faces a threat of being undervalued in the market. This is because the shareholders are the main decision makers of the company having the voting right of the share they carry.
They also deliberately use methods which will increase the value of the target company so that share prices of the company which completed a hostile takeover depreciated remarkably in terms of share price and the prices of the companies which do not succeed in the takeover appreciate above the value of exchange index. Conclusion When there is a threat of hostile takeover, the directors and management of the target are faced with plethora of decisions to make. Whatever decision they decide to take, they are entirely safeguarding their stand in the corporation.
Since shareholders are the main decision makers and the main target umpire, the best decisions made by the management should involve the shareholders thoroughly especially bearing in mind that their main intention (shareholders) is to get maximum value relative to their wealth in the public company. In addition, acquisitions that lead to formation of monopolies and cartels may not be to the public’s welfare. Such monopolies control conditions of the market hence creating room for business exploitation of the society and ultimate failure of the business to take care of societal responsibility.They should therefore be resisted.