On attack or defence, failing to prepare for a hostile takeover is preparing to fail

The dynamics of hostile takeovers in a challenging business environment

A CMS study of hostile takeovers launched between 2017 and 2022 shows that, while relatively rare, hostile takeovers are most commonly launched by an existing shareholder and more often than not result in the successful acquisition of the target company. A successful defence to a hostile bid often depends on the target board’s preparedness, tactics employed as well as its ability to leverage relationships with key shareholders. This article zooms-in on some of the dynamics identifiable on recent hostile takeovers.

Relatively rare between 2017 and 2022

Hostile takeovers were relatively rare in the period from 2017 to 2022, representing just 7% of total firm offers announced during that time.

Few prospective bidders revel in being seen as the ‘villain’ - the public forum in which takeovers play out means that, in launching a hostile offer, there is a risk that the prospective bidder is branded as such.

This relative rarity can be attributed to a number of factors, including the following:

• tools for reducing execution risk utilised on a recommended or ‘friendly’ offer (e.g. irrevocable undertakings) are likely to be unavailable on a hostile takeover; 
• few prospective bidders revel in being seen as the ‘villain’ - the public forum in which takeovers play out means that, in launching a hostile offer, there is a risk that the prospective bidder is branded as such; and 
• prospective hostile bidders are faced with peculiar challenges - for example, due diligence on a hostile target is most likely to be limited to publicly available information.

What does success look like from the bidder’s perspective? 

While relatively rare, hostile offers launched during the period met with a good degree of success with 53% being successfully completed. 

Success, however, came in different forms. A significant number of offers closed short of the key threshold of securing ownership of 75% of the issued share capital, which would have allowed the bidder to pass special resolutions (including resolutions necessary to de-list the target). 

In such circumstances, the successful hostile bidder may be faced not only with the costs associated with maintaining the target company’s listing, but also a rump of hostile minority shareholders who have the voting power to frustrate day-to-day corporate activity (for example, voting down routine special resolutions at annual general meetings held post-completion of the hostile offer).

Better the devil you know? Maybe not …

While previously unknown hostile bidders can and do appear unannounced with opportunistic offers, a significant majority of hostile takeovers were in fact launched by an existing significant shareholder during the period. Stakes were being built-up over time (for instance by way of stakebuilding) or rapidly (for instance where a large block of shares was traded, giving a hostile bidder an entry opportunity). 

This underscores the importance of target board vigilance with regard to changes to its shareholder register so that it can react quickly and deploy defence strategies. 

Another interesting dynamnic observed during the period was the relative thriftiness of existing shareholder bidders compared with previously unknown bidders; not only were existing shareholder bidders more likely to increase their initial offers (suggesting a reluctance to ‘put their best foot forward’ with an initial offer), but the percentage increase offered by existing shareholder bidders was less generous than the increase offered by unknown hostile bidders who increased their offer during the period. 

Strategies in action

Target boards employed a range of defence strategies during the period, with conventional tactics of issuing a defence circular recommending rejection of the offer and solicitation of public statements from target shareholders rejecting the hostile offer being most common. 

But this period also saw less common tactics employed including, on a small number of deals, the utilisation of a White Knight defence, where target boards sought and found a preferred third-party bidder (in each case offering a higher price to target shareholders than the initial hostile bidder) in an attempt to thwart the hostile bid.

There is, however, no ‘one size fits all’ strategy for defending against a hostile takeover and a well-advised listed company will have a playbook tailored to its own specific circumstances. 

There is, however, no ‘one size fits all’ strategy for defending against a hostile takeover and a well-advised listed company will have a playbook tailored to its own specific circumstances. 

Potential uptick in activity in near-term

On attack, some of the most compelling opportunities present themselves in a challenging business environment so we anticipate a potential uptick in hostile takeovers in the near-term. 

On defence, a successful defence to a hostile takeover often turns on the target board’s preparedness as well as the defence strategies employed so we anticipate listed companies revisiting and refreshing playbooks.

If you would like to discuss recent dynamics and trends on hostile takeovers in order to better inform preparations or strategies, please get in touch with your usual CMS contact or one of our Public M&A specialists detailed below.