Hostile Takeovers and Takeover Regulation

Abstract

This chapter provides an economic explanation of defense devices in hostile takeovers and takeover regulation. A Bidder willing to purchase a Target, might make directly an offer to the Target’s board of directors. It could be a bilateral negotiation or a sudden offer open just for a quick time. Investment bankers use some terms to indicate the different type of offers: for example a “bear hug” is an offer to the board not publicly announced or a “godfather offer” is an extremely high cash offer (so that the board is unable to refuse). In case the board refuses the offer, the Bidder can launch a tender offer to the shareholders. Since the offer is not supported by the Target’s board, it is a hostile bid. A successful hostile tender offer is likely to produce the changeover of the Target’s management. It is important to note that tender offers are not necessarily hostile: in other words, a tender offer might be the consequence of an agreement between the management of the Bidder and that of the Target. A tender offer is defined unsolicited until its nature is not defined (i.e., the attitude of the Bidder and Target are not known yet). The incentive, the process, and the outcome of any tender offer (hostile or friendly) is heavily influenced by the regulation in place.