Business development · 13 December 2016

Mergers and acquisitions – protecting your business from a hostile takeover

How to avoid a hostile takeover

Navigating the different kinds of mergers and acquisitions can be a minefield for small businesses. Here we take a look at the main varieties, and how you can avoid falling victim to a hostile takeover.

There can be several reasons for considering acquiring a new company – it might simply be profitable, it might allow a company to expand it distribution or reach over a region, or it might be mutually beneficial to run two businesses as one by cutting costs or redundant activities.

Large businesses often look to snap up innovative startups for a whole host of reasons, and when a business transfers ownership in any way it can be a hugely complex affair. A small business owner needs to make sure they understand all the transactions involved so they don’t get taken for a ride.

Let’s begin at the beginning – what is the difference between mergers and acquisitions? The clue is in the name – a merger involves two companies coming together and “merging” to form one new organisation, and an acquisition involves one company “acquiring” another and absorbing it into its portfolio.

For example, energy giant Exxon-Mobil was formed as the result of a merger back in 1998, and the two companies amalgamated their names to represent the new entity. However, when Disney acquired Lucasfilm for £2.5bn, it simply became the owner of that company’s assets and therefore the rights to produce all the new Star Wars movies and merchandise.

What kinds of acquisitions are there?

Management buy ins and management buyouts are fairly common practice. A management buyout occurs when a group of managers band together to purchase the assets of the company they work for, and become the owners rather than just employees.

There are many advantages to this kind of acquisition, for both the previous and the new owners, one of the main ones being that the company can continue to run as before – there will be a very smooth transition period as the managers running the company remain in place.

In this instance, the previous owner gets the added benefit of knowing the company is in the hands of people they can trust and the management team is able to transition into a business ownership role without the initial startup struggles.

There can be drawbacks to management buyouts of course – agreeing a price that is considered fair by all parties, financing the purchase and the step up from management to ownership can represent hurdles for some.

Similarly, a group could instigate a management buy in – this works as before, except this time the group of managers making the purchase are from an external company. The obvious disadvantage here is that there will be some level of disruption as the new owners will have little to no experience of the running of the company. However, this sort of deal typically takes place when the purchasers believe the company is undervalued and that they can unlock additional value from it.

What are friendly and hostile takeovers?

A takeover in the UK always involves the acquisition of a public company, meaning that its shares are traded on the stock exchange.

In an ideal world, a bidder would make its intentions to purchase the business known to the board of directors, who would weigh up whether or not it was a good deal and in the shareholders’ best interests. The board would recommend the deal to the shareholders, who would then sell their shares.

If the board declines the offer and the bidder pursues the takeover regardless, you have a hostile takeover. Alternatively, a business pursuing a hostile takeover can simply purchase enough stock on the open market, or bend the ear of shareholders until it owns enough shares to hold sway over the company.

The downside of a hostile takeover for the acquiring business is that it will be privy to less financial information. Unbeknownst to them the bidders could be taking on hidden risks. A friendly takeover would be much more accommodating.

How to avoid a hostile takeover

It is rare for a small business to fall victim to a hostile takeover, but better safe than sorry. A simple way for a business owner to ensure against a hostile takeover is to maintain a majority share – in other words, retain 51 per cent of shares. The second you sell past this point, you are opening yourself up to risk.

There are also some pre-emptive measures a business can put in place. For example, you could set up an employee stock ownership plan, where your employees become part-owners of the company. This should help prevent a hostile takeover as, hopefully, the employees would be more sympathetic to the current management than the potential acquirer.

In the event that the business has been targeted for a hostile takeover, there are some strategies such as the poison pill and white knight that can be employed – these include allowing existing shareholders to purchase extra shares to dilute the acquirer’s and make the venture costlier, or seeking an alternative acquirer that the board approves of.

If a hostile takeover cannot be prevented, the Takeover Panel exists as a sort of watchdog to ensure that best practice is employed throughout all UK mergers and acquisitions.

Nothing is guaranteed, but a small business stands a better chance at protecting itself if the owners are fully clued up about the types of mergers and acquisitions it may be subject to. Even if you are growing a business with the intention of selling it later down the line – do your research so that it happens on your own terms.

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Letitia Booty is a special projects journalist for Business Advice. She has a BA in English Literature from the University of East Anglia, and since graduating she has written for a variety of trade titles. Most recently, she was a reporter at SME magazine.

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