Mergers and Acquisitions: The Effect of Defences Erected Against Hostile Takeovers

Mergers and Acquisitions: The Effect of Defences Erected Against Hostile Takeovers

Introduction

In 2015, the value of announced Mergers and Acquisitions (M&As) touched the $5 trillion.^[1] The value of such transactions far exceeds the GPD of various countries across the globe which indicates the importance of Mergers and Acquisitions in today’s world of business. Many companies consider M&As as a corporate strategy (Sunder, 2014) and believe that vital growth can be acquired from the use of such a medium.

Have you ever wondered how companies create that additional value that is so essential for double digit growth when the real economic growth is hovering between 3-4 percent?^[2] They do so by capitalizing on their core competencies and try to scale up in terms of operations and R&D. However, organic business growth is an unsustainable growth strategy and tends to fail in providing double digit returns. In this era where Darwinism in Business is looked upon with utmost regard, Mergers and Acquisitions have increased in popularity and importance.

Most Mergers and Acquisitions are hospitable wherein the representatives of the acquirer and the target negotiate in order to finalize a mutually acceptable deal. However, at times the negotiations fail and the acquirer has the option of either backing away or trying to acquire the company through the use of various hostile tactics. The use of such tactics can be considered as a hostile takeover. A hostile takeover is characterised is characterized as an acquisition of control of a target companywithout a contract or a mutual understanding with the management of the target firm (Savela,1999). Furthermore, if a bid is placed for the shares of the target company without informing its board, the term hostile takeover is also applied (Damodaran, 1997).

It is not surprising to know that there are many reactive measures to a hostile takeover, but which one can be considered to be the best? Another aspect that will be looked into is the proactive measures that can be implemented by companies before a hostile bid. With more than 1000 companies across the globe going public over the last three years, such strategies have increased in relevance and importance as we can see utmost intent in terms of growth.^[3] Hence it becomes extremely crucial for companies to figure out which strategy would suit it the best when faced with a hostile takeover.

Title of study:

Mergers and Acquisitions: The Effect of Defences Erected Against Hostile Takeovers

Statement of the problem:

Most hostile takeovers are fought through the use of defences erected by companies in order to protect the interests of the shareholders, stakeholders or both. However, these defences result in adverse effects for these parties in relation to the target company.This study aims to see the effect these defences have on the company once the attempt of a hostile takeover is over irrespective of whether the takeover was successful or not.

Need for the study:

Mergers and Acquisitions are one of the most common tools of inorganic growth that an organization makes use of to remain competitive in this Darwinian business environment. Most of the research in this field aims to look as to how companies concatenate these M&As with their existing businesses. However, this study aims to look into the other side wherein a company doesn’t want to be acquired and erects defences to make sure that doesn’t happen. Sometimes these defences work, sometimes they don’t and sometimes they result in a Pyrrhic victory. Through this study, I aim to see how these defences affect companies that erect them.