comes from British English. Historically, a
of a target’s
shareholders would be offered to sell their shares on a first-come, first-serve basis,at a good price (usually at a premium over the market price). Once the acquiringcompany had a majority of the tenders (and thus control), the other shareholderswould simply be ignored, since the buyout was effectively complete. A tender bidis usually considered effective only if a minimum percentage of the shares isactually purchased at the stated price
Wall Street investment houses traditionally saw hostile bidding as unrespectable.
In fact, hostile bidders were referred derisively as “
”. However, in
1974, Morgan Stanley broke ranks and advised on the takeover of InternationalNickel. After that, every investment house joined the merger fray to provide thenecessary financing for mergers.
Today, hostile bids may be desirable if 1) the company has confidential corporatesecrets that would be compromised if revealed to the public at large or 2) thetarget company has a dysfunctional shareholder organization, so it would be
difficult to bring them all together in a single room (“high transaction costs”)
Leveraged Buyouts (LBOs)
. A host of new financing devices were created.
A new menu of financial devices (e.g. Michael Milken’s “junk bonds”) gives a newpush to the idea of a “leveraged buyout” (LBO).
LBOs enabled even the smallest group of companies (e.g. T. Boone Pickens
“thegreenmailer” of MESA, a small Texas oil owner) t
o launch credible hostile bidsagainst huge companies (like Gulf, Phillips and Texaco).
Companies like Getty Oil, TWA, and Federated Stores are acquired.
The buyers took the conglomerates, and sold them off piecemeal, earning themhuge returns on their investments.
Merger activity is particularly concentrated in the petroleum, mining, food service(e.g. Safeway), insurance and banking industries.
Hostile Bids Less Common Today
. Hostile tender offers are a lot less common today. In 1988,there were 217 hostile bids. In 1998, there were 22. In 2002, there were only 5 known. In otherwords, the vast majority of mergers today occur as a result of
Initially, hostile bidders enjoyed the protection of the “business judgment rule”. But in th
Delaware’s courts changed their attitude, and became increasingly intrusive. The legal effect was
to excise hostile takeovers from the deferential umbrella of the business judgment rule. This wasmotivated, in part, by a suspicion that directors were acting to feather their own nests, thusrequiring greater scrutiny from the courts.Generally, today
only half of hostile bids actually succeed
. And although they offers have the advantageof being a quick and certain way to do a merger,
hostile bids can also be risky
Hostile bids are a rather impolite way of doing business. They have been replaced by voluntarynegotiations between parties.2.
A hostile takeover can trigger the
defense by the target, which Delaware courtdecisions have tended to agree with3.
Regulations, such as the SEC’s “best price rule”, discourage hostile tender offers. Directors have a
duty to maximize shareholder wealth, so they may reject a good hostile bid if something bettercomes along from yet another company.4.
Companies have protected themselves against hostile bids in various ways.