The Twitter Case: Hostile Takeover, A New System of Business Acquisition?

Repoter : News Room
Published: 23 July, 2023 1:22 pm

The Twitter Case: Hostile Takeover

After the hustle made by Mr. Elon Musk (Now Ex-CEO of TESLA) asking Twitter to sell itself to him, we have been made familiar with a Business Term, “Hostile Takeover”. Recently, after the battle for twitter ownership, we have heard the word “Hostile Takeover” many times. In many legal Series, the hypothetical situation of a company being forcefully taken over by a rouge rich person or another company to further their interests were really enjoyed by us. But now the movie scene has become real and Twitter has gone through the classic “fistfight” over ownership. We’ve seen where such a scenario ends dozens of times over the past decades: The rich shareholder is perfectly positioned to initiate a hostile takeover of a company. And now that’s the reality confronting Twitter. Here I have narrated the possible ways of Hostile takeover and defenses against it.

So, What is Hostile Takeover?

Hostile Takeover happens when an acquiring company known as acquirer attempts to take over a target company against the management’s wish or bypassing the management going directly to the shareholder or fighting to replace the management to acquire the ownership of the target company.

When does a Hostile Takeover become inevitable?

Hostile Takeovers formally occur when negotiations or bargaining break down between the two parties an acquirer (Mr. Musk) and a public company’s board of directors(Twitter in this case). When a company “A” wants to expand it’s business to a new territory or it becomes necessary for the growth of the acquirer company to take over another company “B” or to eliminate competition or for any other probable reason and:

The Management or the Board of directors of the target company conclude that the offer is not in the interest of the shareholder and
Rejects the offer.
Despite being rejected by the target company, the acquirer company pushes for acquisition of the target company forcefully.

The offensive Strategies in Hostile Takeover

There are many ways of Hostile Takeover of another company namely, Tender Offer or Proxy Fight. What Mr. Musk did, in this case, was the former one. He silently bought a 9.2% share of twitter from the open market and then started attacking twitter management, and soon it became the case of a classical fist fight over the ownership between the two.

How actually these strategy works?

Different brilliant lawyers develop these strategies in different times for their own necessary situation handling. In business no one is above the profit, so legally, a company comes into existence for profit making unlike other legal entities. Here, a Hostile takeover is another method of profit-making pathway for businessmen with the help of loopholes in Corporate and business laws.

Tender Offer

Tender offer works in the way that the acquiring company bypasses the Target company’s Board of Directors and makes an offer directly to the target company’s shareholders at a premium price. For example, In the case of the Twitter acquisition, Mr. Musk made 54.20$ offer to buy the remaining 91% of shares while the market value was 48$ at that moment. A tender offer strategy aims to buy more than 50% voting shares to have a controlling equity interest in the target company. If enough shareholders do not give in to the offer, the offer becomes dead.

Proxy Fight

A Proxy Fight Strategy means that the acquirer starts grouping with the inner circle and tries to vote out the existing management out of its power replacing, them with more convenient management. For example, in the present case, if Mr. Musk shakes hands with the Vanguard Group to vote out the existing management and replace them with more friendly management towards Musk’s Bid.

Is there no solution to Hostile Takeover?

The answer is ‘yes’. There are many defensive methods to kill a hostile takeover bid. As the laws are not only sword but also shield. The following methods are also developed by lawyers to keep the company in the hands of the former owner and protect the interest of the board of directors.

Defensive Strategies in Hostile Takeover

Poison pill

The So-called “Poison Pill” strategy works by allocating more market shares for the target company’s current shareholders to purchase new shares at a discount price. In the present case, Twitter also tried to kill the deal by placing “Poison Pill” strategy, formerly known as “the shareholder rights”. The aim here is to make it more difficult for the acquirer to buy all the shares; as the shares increases in number, it also becomes more costly to buy all of them. So the acquirer will become frustrated with the price and give up the attack. The poison pill strategy tries to kill the bid for a hostile takeover by creating a costly environment for the acquirer.

Crown jewels defense

It is one of the last methods resorted by the company to protect itself from hostile takeover. In the Crown Jewels defense mechanism the target company sells it’s valuable property to make it look less lucrative for the acquirer company. By losing valuable property the company becomes less desirable hence the acquiring company gives up the takeover bid. To adhere to this method the company must have the acknowledgement about what is the crown jewel or most valuable added with most desirable to the hostile bidder. It varies from business industry to industry such as in case of automobile it may be a technology or manufacturing facility and in case of tech companies it may be any algorithm patented by the company which the other company requires.

Supermajority amendment or Shark Repellent

An amendment in the Charter of the company to have the 60-90% shares to vote a merger of the company. By making changes in the bylaws, the target company makes itself less attractive to the hostile bidder and tries to avoid the takeover. Sometimes the takeover becomes profitable for the shareholder yet this method makes the takeover bid unsuccessful. Some methods of Shark Repellent are as follows.

Golden parachute

An employment agreement that calls for the payment of pricey perks to top management in the event that they are fired after a takeover. Again, the goal is to make buying impossible for most people. This is an agreement between the company and the higher executive official of the company to pay them a lumpsum amount of money in case of merger or takeover by another company. This is also the case in the Twitter takeover bid. The former CEO of Twitter Parag Agarwal, has been sacked after the takeover by Musk and paid out a huge amount of $38.7 million. The other Executive, Ned Segal was paid an amount of $25.4 million. The other executives had also been paid a large amount of money as compensation for their layoff.

Greenmail

Greenmail is the way by which the target company repurchases every share that the acquiring company had purchased for premium money. When the Hostile bidder silently buys substantial amounts of shares of the target company, then the target company becomes bound to buy back those shares for a premium and the greenmailer profits from this exercise. The critics find this method illegal and compare it with extortion though some claim it to be free trade practice.

Pac-Man defense

Pac-Man defense is the offensive in defense role. The Target Company, in response to the hostile takeover bid of the Acquiring Company, retaliates with the same strategy and tries to buy the acquiring company’s shares. When the acquiring company feels the hit of losing its own company, it will back off and call off the attack. This strategy can only work when the target company is as wealthy as the acquiring company or far bigger and richer than it.

Dual-Class Stock

The strategy behind this method is that the Corporation floats two classes of shares in the market, One kind having the voting rights as well as another without having any voting rights in the company. By keeping the majority of the those shares with voting rights, the Management Board can keep the control of the company in itself and also acquires capital through other kinds of shares in the open market.

The White Night

When the management acquiring company believes that it cannot win the fight against the target company it comes to the table. It becomes possible when the target company possesses a white knight with shining armor to protect it. It happens when the acquiring company finds a friendlier company and sells them the majority shares. It happened in the case of GESCO to block Renaissance Real Estate, and their white knight was Mahindra and Mahindra.

Conclusion

Whatever strategy a determined acquiring company may follow never leaves any stones unturned until the target company is taken over. This was also the case of Twitter. Twitter had to come to the table for a possible deal. Hostile takeover is very different from Friendly takeover as in case of a friendly takeover the acquiring company and the target company work together to merge or transfer the management, for example friendly takeover bid of Activision by Microsoft. But the tweet fights which started between Mr. Musk and Twitter Management had turned into a hostile takeover bid as Dan Ives says, “This now goes from a Cinderella story with Musk joining the Twitter board to likely a Game of Thrones battle between Musk and Twitter.”

These methods are not so popular or practiced in the Indian subcontinent due to strict laws against it. The only case of a successful hostile takeover in the Indian context occurred in February 1998, when India Cements Limited (“ICL“) bid for Raasi Cements Limited (“RCL”).At the end, no recommendations can be made for any kinds of defensive strategies as they were unable to put a stop to the takeover bid eventually. It happened in the case of Hilton and ITT also. But it will also be untrue to cast a blind eye over those strategies as they were the creation of brilliant research and development of jurisprudence. In today’s modern world, companies are far more aggressive than they were before. So, it wouldn’t be a surprise if it becomes a strategy in business to take over any competing or small companies by big and large companies.