Acquisition vs hostile takeover: what’s the difference?

These two terms are typically used interchangeably in the business world, but rest assured – there are very clear differences between them both, which you may experience first-hand during your time as a business owner.

Acquisitions

If your company is subject to an acquisition, you have agreed in advance to the sale of your business to another company. The acquiring company takes control of your businesses operations and assets, and will own either all or a majority of its shares.

Acquisitions can sometimes be referred to as ‘friendly takeovers’, and why not? You’ve just made money selling your business to the ideal company!

Data from PwC revealed that global mergers and acquisitions in 2021 exceeded 62,000, up a huge 24% from 2020. But despite this, the number of mergers and acquisitions in the UK dropped sufficiently in 2021 compared to 2020, from 3,367 to 1,624, according to the latest Institute for Mergers, Acquisitions, and Alliances (IMAA) data.

Don’t let these UK figures deceive you. Acquisitions are very much commonplace in the business world, and as the UK economy slowly recovers from the fallout of the COVID pandemic, they will increase across the board.

Hostile takeovers

But what about hostile takeovers? Unlike acquisitions they are far from friendly in that target businesses are purchased by an acquiring company against the wishes of the businesses directors and majority shareholders.

Perhaps the most famous example of a hostile takeover in the UK was that of Cadbury PLC by Kraft Foods Inc back in 2009. Cadbury rebuffed Kraft’s advances as unwanted and undervalued, and the situation escalated so much so that even the British government became involved in the takeover debacle.

Hostile takeovers are ruthless because they can happen so quickly (just look at Musk’s Twitter takeover turnaround) – saving the acquiring company time negotiating with the target business.

They typically occur in two ways…

Tender offering

Tender offering is the most common approach and is when the acquiring company will go directly to the businesses shareholders with a tender offer, which is essentially an overpriced premium figure for their shares that is too good to turn down.

Once they’ve purchased enough shares to have control of a majority share of your business, the hostile takeover is complete.

Proxy contest

The second way a hostile takeover occurs is known as a proxy contest. This is the hostile acquiring company’s attempt to remove current members of an executive board team and replace them with directors that are in support of the takeover.

Microsoft attempted to do this when bidding for Yahoo back in 2008, but gave up its attempts after it decided to stop pursuing the acquisition.

Tender offering only works on listed companies (those that are operating on the stock exchange) so the majority of smaller companies should be safe as they are typically privately owned.

It is however undeniably important to be aware of these takeover methods whenever you do decide to take your company public.

And even though you may not be subject to a traditional hostile takeover, there are still ways you can protect yourself from a takeover that is far from a friendly acquisition.

How at risk is my small business from a hostile takeover?

According to Dr Christopher Kummer, President of the Institute for Mergers, Acquisitions & Alliances (IMAA), startups and SMEs are prone to frequent hostile and at times aggressive takeovers.

Particularly those that have come out of the pandemic unscathed, passed a real-life resilience test, and proved their value. Kummer says:

“Aggressive takeovers of startups are very common and are not reserved to MNCs (multinational corporations) being the acquirer; many SMEs also seek to accelerate their growth through the acquisition of startups.

“If a business is not keen on selling, acquirers tend to focus on the different shareholders and/or board members and management within the target company and convince them to sell.

“Another method could involve the acquirer threatening to enter the market and compete with the target, hence pressuring the business into selling instead of worrying about increased competition from an established company.”