What Is a Hostile Takeover?

Answers to your questions about the news.
Nov. 11 1999 11:10 AM

What Is a Hostile Takeover?

Last week, the drug companies American Home Products and Warner-Lambert agreed to a $72 billion merger. Hours later, Pfizer, another drug company, launched an $82 billion hostile takeover bid for Warner-Lambert. What makes some takeovers hostile? And how do they work?

Advertisement

In a friendly takeover, the management teams of the acquiring and target companies negotiate the terms of the deal--covering issues such as how shares in the new company will be divided--and then both companies' boards of directors and shareholders approve it.

A takeover is deemed hostile when the target company's management objects to the deal. (This is the case with Warner-Lambert, which quickly rejected Pfizer's takeover bid. Pfizer has since filed suit to block the AHP-Warner merger.) In a hostile takeover, the acquirer can take control of the target company's management one of two ways: a tender offer or a proxy fight.

In a tender offer, the acquirer offers to buy shares of the target for more than the market price. Individual shareholders then decide whether to sell their holdings; if the acquirer doesn't win a controlling stake, the offer is rescinded and the shares returned. In a proxy fight, the acquiring company asks shareholders for their "proxies"--that is, the right to vote in their stead in management elections. The acquirer promises to replace the board of directors that rejected the merger with one that would approve it. As in a tender offer, shareholders are guaranteed profit--either through cash payments or more shares in the new company--if the takeover is successful.

Although Pfizer has not officially made a tender offer or begun a proxy fight, it has made clear to Warner-Lambert shareholders that they would benefit financially from the deal: Pfizer would offer them 15 percent more per share than AHP. (Click here to read Slate's "Moneybox" on why these mergers don't usually create the value investors expect.) But AHP and Warner have tried to prevent such an offer from ever reaching shareholders by including a $2 billion breakup fee in their agreement. This provision requires any company that thwarts the marriage by acquiring one of the partners to pay the other partner $2 billion. Pfizer is challenging the breakup fee in court, arguing that the companies' boards neglected their obligation to pursue the best interests of the shareholders by undermining attempts at a hostile takeover.

Explainer thanks Prof. Adam Pritchard of the University of Michigan Law School.

TODAY IN SLATE

Culturebox

The Ebola Story

How our minds build narratives out of disaster.

The Budget Disaster That Completely Sabotaged the WHO’s Response to Ebola

PowerPoint Is the Worst, and Now It’s the Latest Way to Hack Into Your Computer

The Shooting Tragedies That Forged Canada’s Gun Politics

A Highly Unscientific Ranking of Crazy-Old German Beers

Education

Welcome to 13th Grade!

Some high schools are offering a fifth year. That’s a great idea.

Culturebox

The Actual World

“Mount Thoreau” and the naming of things in the wilderness.

Want Kids to Delay Sex? Let Planned Parenthood Teach Them Sex Ed.

Would You Trust Walmart to Provide Your Health Care? (You Should.)

  News & Politics
Politics
Oct. 22 2014 9:42 PM Landslide Landrieu Can the Louisiana Democrat use the powers of incumbency to save herself one more time?
  Business
Continuously Operating
Oct. 22 2014 2:38 PM Crack Open an Old One A highly unscientific evaluation of Germany’s oldest breweries.
  Life
Gentleman Scholar
Oct. 22 2014 5:54 PM May I Offer to Sharpen My Friends’ Knives? Or would that be rude?
  Double X
The XX Factor
Oct. 22 2014 4:27 PM Three Ways Your Text Messages Change After You Get Married
  Slate Plus
Tv Club
Oct. 22 2014 5:27 PM The Slate Walking Dead Podcast A spoiler-filled discussion of Episodes 1 and 2.
  Arts
Culturebox
Oct. 22 2014 11:54 PM The Actual World “Mount Thoreau” and the naming of things in the wilderness.
  Technology
Future Tense
Oct. 22 2014 5:33 PM One More Reason Not to Use PowerPoint: It’s The Gateway for a Serious Windows Vulnerability
  Health & Science
Wild Things
Oct. 22 2014 2:42 PM Orcas, Via Drone, for the First Time Ever
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.