Problems of Hostile Takeover - Essay Example

Problems of Hostile Takeover Table of Contents 3 Introduction 4 Background and significance 4 Discussion 6 Implications 8 Conclusions and recommendations 9 References 11 Abstract There are a variety of corporate mergers and acquisitions among which is the ‘hostile acquisition’. The main feature of distinction in such a corporate takeover is that the management of the target company is not in consent into the merger (Cassada, 2004). A hostile bid entails an offer that is meant to control shareholding; commonly it is not welcome to the incumbent management whether or not the management recommends the acceptance of such a bid or another one. This research paper intends to analyze the features that characterize hostile acquisition through a case study of ‘Jos A. Bank’ and as such identify the main challenge that are faced by both the target company and the acquiring company. Besides, the study will employ a qualitative approach through which deductions from past studies and such other literatures will be instrumental. Among other major challenges identified are the risks involved with information asymmetry by both parties involved in the acquisition. Introduction Hostile takeover has not been much desirable as a form of merger or acquisition due to the effects that both the corporate involved suffers. This paper takes special attention on definition of hostile takeover, looks into the emergence of the concept of hostile takeover(s) and evaluates an example of a corporate involved in hostile takeover. It also evaluates the background of the concept and hence recommends on the possible future path in studying the concept. Besides, the paper will evaluate on the development and application of hostile takeovers among countries and the effect in shaping the direction of hostile takeover(s) and the legislation. The qualitative analysis of the topic in this paper therefore presents very useful information that would be very important in future studies. Background and significance Although the ideology of the hostile takeovers and tenders have been in existence for decades; they remain rare as in often times, the other types of acquisitions have been preferred. The adoption of the second generation of state-level antitakeover laws that was applied between 1987 and 1990 provides an exogenous increase in the cost of hostile takeover, which go hand in hand with a natural control sample of sample of states that did not pass such laws (Mantone, 2005). Moreover, the effectiveness of these laws is criticized by the question of how frequent the takeovers may be while considering the preference of other type of merger and acquisitions. In January 2014, Mirabella reported on the efforts by a bank to stop an anticipated ‘hostile takeover’ by another company by altering the poison pill being eyed. The bank adopted the weapon of making the process of acquisition more expensive and thus discouraging the bidding company from the plans (Mirabella, 2014). While the bidding process in hostile takeover involves asymmetry in information shared the process involved has the ‘competition’ pointed towards getting the strongest management team stand to the end over the bid. The weapon here is hiding any information perceived as crucial for the safety of the target company from the bidding company in order to have the bidder contend with the risk of uncertainty (Manne, 2002). In understanding a takeover or a merger, it is necessary to acknowledge that they all involve some forms of integration. Nevertheless, the degree of integration varies depending on such factors as necessity on cost synergies, levels of compatibility between the diverse culture represented by the corporate as well as the issues of proper timing in the acquisition and the size of the corporate. Issues of merger integration involve harmonization of functionality of the merged corporate entities and this concerns organizational structures, merging cultures as well as integration of systems of operations (Holman, 2003). Besides, there are issues that arise regarding location of the transacting entities in terms of cross border relations. In a standard merger, the process involved pertains identifying the target company, conducting a valuation and placing an offer, completion as well as integration in the post-acquisition stage. However, as pointed out earlier, the hostile takeover fails to honor the mutual agreement and instead has the bidder impose an offer to the target. It is however worth noting that hostile takeovers may adopt‘hostile’ and or ‘friendly’ aspects which would also point towards particular problems with the mergers. When a target management team or board rejects an offer for acquisition by another company, this results to what is termed as the hostile takeover while the one that involves the management accepting the offer, the takeover is presumed as friendly. Discussion This type of acquisition is contrasted with the mutual consent through which many of the other types of acquisition occur. Through the mutual agreement acquisitions, the parties participating are accorded equal opportunities to evaluate on the benefits alongside the costs to be involved and as such, the mutual consent results from informed evaluations. On the contrary, in the hostile acquisition, the target company often fails to avail much of its information and as such presents a challenge of limited information to the interested company. This therefore presents a challenge to the acquiring company in that it may suffer great losses and or risks in the future of the acquisition. Hostile takeovers allow dodders to seek control directly from shareholders and this is done by going over the will of target management (Anderson, 2006). Hostile takeover bidders adopt tendering processes in order to win the consent of the target corporate into the merger. However, the tool does not always prevail in winning the target corporate into consent and as such, the coercion into the takeover follows at the bargaining table. Besides, the bidder holds to an offer in terms of the worth and compensation of the target corporate in the event of the merger and this represents the value of the hostile takeover. The main challenges that such a hostile takeover poses are loss of expertise and experience with quitting management personnel, possible resentment by the target stakeholders which include the local communities and employees as well as increased risk for paying higher as a result of errors in valuation due to information asymmetry. The overall effect of such problems as identified in the case study of the bank is together with disruption of trading activities through high costs, cultural clash, and customer loss, increased resistance as well as increased rates of failure. Besides, disruption of management poses a great challenge in furtherance of the operations of the new merger. While there are various ways through which problems encountered through hostile integration can be overcome, standard measures often lacks due to the complexities involved hence the ultimate consequences resulting. Among other means through which the integration problems may be overcome are: observing diligence, integration planning, quick acting, effective and clear communication as well as respect on cultures. On the issues of due diligence, it is prerequisite that likely area of risks be observed and this would include customer impacts as well as IT systems. Diligence also entails carefully planning on the takeover in order to have minimal losses (if any) suffered. After a hostile takeover happens, it is necessary that the management involved acts quickly in order to streamline the operations of the company and in the process overcome challenges in offering value to shareholders and the customers alike (Irfan, 2011). Moreover, proper communication as well as respect of diversity in cultures would be perceived as important ways of overcoming and avoiding the challenges that come about with hostile takeovers. Besides the general problem that emanate from hostile takeovers, the management face critical challenge(s) on employees and customers. With the employees, there is much of uncertainty over the intention of the acquirer as the processes of acquisition are not always rational. On the other hand, customers perceive a threat through impact of the takeover on the services and products’ quality as well as fate of relationship on matters of perpetuity. When the challenges are not well monitored and planned for, many of such acquisitions fails not only due to the internal problems that have been discussed but also due to increased competition by rival operators within the industry. Implications The foregoing discussion highlights some of very fundamental attributes to be understood in various types of takeovers with particular attention on hostile takeovers. Even if a bidder may identify a potential target company for a merger, hostile takeover may not necessarily by the most effective tool to adopt as much resistance may result from the shareholders, the management as well as other interested parties like the customers and rivals within the industry who would equally be interested with such an acquisition (Eyssell, 1986). The management may adopt various tools as defensive mechanisms which include making their firms undesirable, sourcing for better offers from other interested buyers, harassment through legal avenues and possible luring of shareholder to side with the management in efforts to prevent the intended hostile takeover. The discussion in support and or revolves around various elements that are well espoused on corporate governance. Financial as well as market pressures always have an impact on managerial practices of firms (Gürtler&Kräkel, 2009). In fact, many arguments have been projected to imply that such forced mergers are usually meant to exert pressure on management teams to act in favor of shareholders as should be the rational way. According to the agency theorem, shareholders often delegate managerial responsibilities on the management teams by the assumption that they are competent in the responsibilities and thus would not expect such failures that would lead to such hostile takeovers by other firms. Nevertheless, in the event that shareholders are interested in such acquisitions, the need to have higher command and higher profitability in the operations of the corporate may be basic to explanation. It would therefore be perceived as necessary although inappropriate in other dimensions as the sovereignty of the corporate would be compromised for the acquiring company. It would be necessary as it would bring about wider access to capital as against when the corporate operated on its own while undesirability would emanate from loosing shareholders’ sense of power in operations of the corporate. In a different perspective, the ‘efficient market hypothesis’ comes into play while one considers hostile acquisition as having no consent/agreement by both corporate merging. The target corporate usually plays tricks through hiding much of the necessary information on valuation in order to have the bidder risk gaining or losing from the forced merger. These are therefore among other key attribute that come into play while corporate consider forceful mergers as would describe hostile takeovers. Conclusions and recommendations In conclusion, this paper finds that hostile takeover ideology in corporate mergers and acquisitions is not a new ideology. It has been adopted for acquisition over many years with different factors playing in favor and or against it. The main distinction over the hostile takeover from other kinds is that it does not attract consent of both parties involved and one corporate plays as the bidder while the other plays as the target. While the bidder tries all ways possible to win the consent of the target management into the merger, the target plays hard to get through information asymmetry which has been seen to pose the main challenge in form of risks suffered by the bidder. The discussion above shows that both parties experience particular problems in the process with the bidder suffering risk of higher costs, loss of market command through loss of customer loyalty as well as through increased pressures from the rivals in the industry. Moreover, in the event that the management of the target corporate runs away, the ‘new’ corporate management may suffer managerial competence which would have adverse effects towards the bidding corporate. On the other hand, the target corporate suffers coercion into consenting into the merger plans through which the sovereignty in the operations of the corporate is compromised. The shareholders equally stand to suffer low margins in profit while overall valuation of the corporate may be compromised hence losing the actual worth of the investment. The study has identified various solutions to such issue as have been pointed out to affect both the bidding corporate and the target corporate among which are observing diligence, integration planning, quick acting, effective and clear communication as well as respect on cultures. However, it is acknowledged that some of these solutions involve improved interaction by the two corporate which would facilitate effective communication to ease of planning processes, valuation processes, improved intercultural relation as well as high levels of diligence. Whereas hostile acquisition has the main characteristic of non-agreement kind of acquisition, proper planning would reduce on the effects resultant after the takeover has already taken place. Recommendation: Although the general perception that comes into one’s mind over the topic of hostile takeover is on forceful takeover, literature has confirmed that the necessity of the ideology in organizational management cannot be refuted. This is because; the adoption of consent in mergers and acquisitions may not be an option whereas the performance of an industry dictates formation of such mergers. However, it must be acknowledged that in many instances, private interest of the bidders leads to hostile takeovers often on the less ‘powerful’ corporate. Therefore, there should be established a criteria through which the use of hostile takeovers would be evaluated and justified. This paper therefore recommends further studies on factors that would support the use of coercion into forming mergers and evaluate the most effective procedures to be pursued in order to overcome such discussed problems which often characterize hostile takeovers. This recommendation therefore requires establishment of a predefined scale through which the appropriateness or otherwise of a hostile takeover could be evaluated. References Anderson, Noel. (2006). Hostile takeover: Ant unionism and the neoliberal politics of urban school reform in New York. Working USA: The Journal of Labor and Society, 9(2), pp. 225-243. Cassada, J. (2004). Hostile takeover. Library Journal, 129(20), 105. Eyssell, T. H. (1986). The effects of hostile takeover bids on their targets: an empirical test of the corporate control hypothesis (mergers, acquisitions, proxy, tender). (Order No. 8707407, Texas A&M University).ProQuest Dissertations and Theses, , 234-234  Gürtler, O., &Kräkel, M. (2009).Hostile takeover and costly merger control. Public Choice, 141(3-4), ManneH. G. (2002). Bring back the hostile takeover. Wall Street Journal Retrieved from http://search.proquest.com/docview/398838943?accountid=45049 Holman, W. J. (2003). Corporate governance (A special report): Essay --- dont sweat it: Theres nothing wrong with corporate governance that the threat of a hostile takeover couldnt fix. Wall Street Journal Retrieved from http://search.proquest.com/docview/398957866?accountid=45049 Irfan, M. (2011).The role of executives in hostile takeover attempts. Journal of Economic Interaction and Coordination, 6(1), 29-40. Mirabella, L. (2014). Mens wearhouse launches hostile takeover of Jos A. bank. McClatchy - Tribune Business News.Retrieved from http://search.proquest.com/docview/1474426957?accountid=45049 Mantone, J. (2005). A change of plans: Beverly agrees to auction after hostile takeover moves. Modern Health, 35(13), pp. 18-20 Read More