What is a hostile takeover?

1. What is a hostile takeover (takeover without consent)?

A hostile takeover is a takeover that is carried out without the prior consent of management, shareholders, etc., to acquire management rights in the target company. In English, it is expressed as a hostile takeover.

The reasons behind a hostile takeover include a company's growth strategy and motivation to strengthen its competitiveness, shareholder expectations, conflicts between management and shareholders, and market conditions.

It is called a "hostile" takeover because it does not have the consent of the parties involved, such as management or shareholders, but if it is carried out with the prior consent of the parties involved, it is called a friendly takeover.

Furthermore, in the “Guidelines for Conduct in Corporate Acquisitions'' formulated by the Ministry of Economy, Trade and Industry on August 31, 2023, the term “hostile takeover'' is replaced by “takeover without consent.''

An acquisition without consent is an acquisition that takes place without the consent of the target company's board of directors. Includes acquisition equivalent to the English hostile takeover [Source: Excerpt from the Guidelines for Conduct in Corporate Acquisitions (August 31, 2023/Ministry of Economy, Trade and Industry)]　

2. Difference between a hostile takeover and friendly takeover

In the case of a friendly acquisition, the terms of negotiation vary, such as the succession after the acquisition, but in many cases, the owner-managers and executives of the target company remain. On the other hand, in a hostile takeover, there are many cases in which the management team is forced to resign.

Friendly acquisitions require careful consultation and negotiation of terms by both companies in advance to ensure smooth integration after the acquisition is completed. It has the advantage of being easy to use.

3. How to conduct a hostile takeover

For a hostile takeover to be successful, a company must own a majority of the voting rights of the target company or more than 50% of the total number of outstanding shares. Stocks are generally purchased through a tender offer (TOB). In the case of market transactions, there is a high possibility that the stock price will rise, and the takeover party will need a large amount of capital.

In TOB, the “purchase period, number of shares to be purchased, and price'' of the target company's shares are announced in advance, and then the shares are purchased from an unspecified number of shareholders. The purchase price at this time is generally set at around 30-50% higher than the market price.

4. Advantages of a hostile takeover

The main benefits of a hostile takeover are:

4.1 You can quickly carry out corporate reforms that reflect your company's management policies

Obtain management rights in a target company by omitting the effort and time required to negotiate with the management team of the target company. You can quickly advance corporate reforms in line with your company's management policies without inheriting the ideas of previous management.

4.2. You can ask shareholders what the company should be like

As mentioned above, the purchase price of a stock tender offer conducted in a hostile takeover is usually set higher than the market price. Therefore, shareholders can directly compare the management policies and stock price strategies of the acquirer and the target company. Therefore, a hostile takeover can be viewed as an opportunity for shareholders to consider which management policy is more appropriate for the company.

4.3. Easy to plan acquisitions

In a hostile takeover, shares are acquired through a TOB (tender offer), so the purchase period, number of shares to be purchased, and price per share are publicly announced.At the time of the public announcement, the acquisition period and necessary costs can all be calculated, making it easier to plan the acquisition. Additionally, compared to assuming that all stocks are purchased from the market, the risk of acquisition costs increasing as stock prices rise can be reduced.

5. Disadvantages of a hostile takeover

The main disadvantages of a hostile takeover are:

5.1. Acquisitions are more likely to fail than friendly acquisitions

A hostile takeover is generally perceived as a "takeover" and has a negative image, leading to opposition and rejection from the target company's management and major shareholders. This will make it difficult to obtain shareholder approval, and the company will be forced to give up on acquiring more than 50% of the stock.

Additionally, the target company may have takeover defense measures in place, so the success rate is not as high as in a friendly takeover.

5.2. Brand image may deteriorate

As mentioned above, hostile takeovers tend to have a negative image in Japan, so there is a possibility that the brand image of companies that initiate hostile takeovers and the reliability of their products may be negatively affected.

5.3. There is a possibility that synergy effects will not be realized after the acquisition.

Although there is a conflict between the party initiating a hostile takeover and the target company's management, a hostile takeover does not necessarily have a negative impact on stakeholders such as shareholders, employees, and business partners.

However, after the acquisition is completed, it is predicted that there will be many cases where employees and related parties become anxious due to the different management policies and environment, leading to them leaving their jobs or reconsidering the transaction.

Furthermore, if the cooperation of related parties such as the target company's employees and business partners is not obtained, it may be difficult to realize the synergistic effects of the acquisition.

6. Defense measures against hostile takeovers

From this point on, we will look at defensive measures against a hostile takeover from the perspective of the takeover target. Defensive measures can be broadly divided into those that are prepared during peacetime and those that are implemented after a hostile takeover has been initiated (after the acquirer appears).

However, regarding policies for responding to such hostile takeovers, there are many concerns from shareholders and institutional investors that “the introduction of takeover defense will worsen corporate performance.'' Therefore, it is actually difficult to use them without gaining the understanding and consent of shareholders and institutional investors. According to the "Action Guidelines for Corporate Acquisitions" released by the Ministry of Economy, Trade and Industry in August 2023, the number of companies that have introduced response policies has been on a downward trend since 2008, especially in the TSE First Section and prime market.

On the other hand, since sound takeover defense measures are highly likely to lead to improved long-term shareholder value, there are also opinions that they would be in favor of them as long as they eliminate the arbitrariness of management; evaluations of takeover defense measures are divided. I am.

For more information on how to respond to a hostile takeover, please also see the related article.

6.1. Rights Plan (Poison Pill)

A rights plan, also known as a poison pill clause, is one of the defense measures against a hostile takeover.

If a hostile takeover company attempts to acquire a majority of the shares, it provides existing shareholders with the right to purchase additional shares at below market price, increasing costs for the acquiring company and preventing a hostile takeover. It leads to

Rights plans include a “rights plan trust,'' in which stock subscription rights are entrusted to a trust bank in advance, and an “advance warning type rights plan,'' in which takeover defense measures are disclosed during peacetime to warn against a hostile takeover. there is.

An example of a rights plan preventing a hostile takeover is in 2007 when the Japanese seasoning maker Bulldog Sauce blocked a hostile takeover by the American hedge fund Still Partners.

6.2. Golden parachute

A golden parachute is a financial protection paid to a company's top management or key executives if they are fired. The name is said to be derived from the metaphor of “old management escaping from a crashing plane with golden parachutes.''

If the target company's management team is to be fired due to a hostile takeover, signing a contract with a large amount of severance pay increases the risk that the acquiring company will fire them, which will serve as a deterrent to the hostile takeover. The measure of concluding a contract to pay extra severance pay to employees other than management is called a tin parachute.

An example of a golden parachute is Kohlberg Kravis Roberts' acquisition of RJR Nabisco. In 1989, when RJR Nabisco, a tobacco manufacturer in North Carolina, was acquired by Kohlberg Kravis Roberts, then-CEO Ross Johnson was given a golden parachute of $58 million (at the time). Approximately 8 billion yen) was paid at the exchange rate.

6.3. Change of Control (COC) Clause

A change of control (COC) clause is a clause that states that if there is a change in the control of a party to a contract due to an M&A or other reason, the other party cannot impose restrictions on the content of the contract or cancel the contract itself. This refers to the contract provisions that apply to

For example, when granting licenses or business rights, adding a COC clause to the contract can prevent technology transfer if management rights are transferred to a third party. For companies that are highly dependent on contracts with specific companies, this can be an effective defense against a hostile takeover.

In Europe, when a company that is considered to be at high risk of being acquired is issuing corporate bonds, it is common for investors to request that the bonds be provided with a COC clause. Bonds with COC clauses have a put option that gives the acquiring company the right to repurchase the bonds in the event of a change in control, such as due to an acquisition. In other words, it exerts a deterrent effect as a defensive measure against hostile takeovers.

In Japan, Sapporo Holdings made headlines in June 2007 when it issued its first corporate bond with a change of control clause.

6.4. White knight

A white knight is a defensive measure in which a company facing a hostile takeover attempts to find another friendly acquirer to acquire or merge with it, thereby preventing the hostile takeover. The new friendly acquirer is compared to a knight on a white horse and is called the White Knight.

For companies that become white knights, they can be offered unplanned M&A, which means they are presented with more favorable terms than usual.

A typical example is Don Quijote's hostile takeover of Origin Toshu in 2005. In addition, in the case of KOKUYO's hostile takeover of Pentel, which will be discussed later, the takeover was defended by White Knight.

6.5. Scorched Earth Strategy (Crown Jewel)

A scorched-earth strategy is a takeover defense measure in which the acquiring company reduces the value of the acquired company by selling its assets and businesses to affiliated companies or assuming debts from financial institutions. It is also called the Crown Jewel, as it is an analogy of removing a valuable jewel from a “crown'' (company).

A scorched-earth strategy is similar to a situation in which an army when routed, destroys its own bases and bridges to deplete the other side's logistics. Although a hostile takeover itself can be prevented, there is a risk that the company's value and profits will be significantly damaged.

An example of this scorched earth strategy is Livedoor's hostile takeover of Nippon Broadcasting System. Nippon Broadcasting System, which was subjected to a hostile takeover by Livedoor, attempted to make Fuji Television a subsidiary by issuing stock acquisition rights. However, making the company a subsidiary was blocked by a provisional disposition by the Tokyo District Court.

Nippon Broadcasting Corporation has announced that it will consider selling the shares of its subsidiary, Pony Canyon, in order to reduce the corporate value of Nippon Broadcasting Corporation and Fuji Television.

6.6. Third party allotment capital increase

Third-party allotment capital increase refers to issuing new shares to a specific third party when increasing capital.If capital increase through third-party allotment is used as a measure to prevent a hostile takeover, when a takeover is initiated, new shares or stock acquisition rights are allotted to a third party to dilute the stock and reduce the amount of the acquirer's holdings. Let the ratio drop.

An example of this is Hokuetsu Paper's third-party allotment of capital to Mitsubishi Corporation in 2006. Hokuetsu Paper, which was subject to a hostile takeover from Oji Paper in 2006, approached Mitsubishi Corporation about accepting a third-party allotment of capital, and Mitsubishi Corporation agreed, resulting in the TOB by Oji Paper falling through.

However, Article 210 of the Companies Act provides that if the issuance of shares is carried out in an extremely unfair manner, the company may request that the issuance be stopped. Therefore, the acquiring company may apply to the court for a provisional injunction regarding the third-party allotment of capital by the acquired company.In fact, in the case of Livedoor's hostile takeover of Nippon Broadcasting Corporation mentioned above, the third-party allotment of capital that was intended to be issued to make Fuji Television a subsidiary was blocked by a provisional disposition by the Tokyo District Court.

6.7. Dividend increase

A dividend increase means paying more dividends to shareholders than usual. As a preventive measure against a hostile takeover, when the acquiring company is targeting the acquired company's highly liquid assets such as deposits and savings, increasing dividends is used to defeat the purpose of the acquisition itself.This method, like the scorched earth strategy, is a desperate method to prevent a takeover by destroying the value of the company itself. Even if a takeover is prevented, the disadvantage is that subsequent corporate management becomes difficult.

For example, in 2012, Accordia Golf, the largest golf course company, announced a dividend increase policy of paying 90% of its net income as dividends when PGM Holdings, the second largest company in the industry, attempted a hostile takeover. I can list it.

7. Examples of hostile takeovers

7.1. KOKUYO’s hostile takeover of Pentel (2019)

In November 2019, stationery giant KOKUYO launched a hostile takeover bid against Pentel.Although Pentel is an unlisted company, KOKUYO has 37.45% of the voting rights by making the fund, which is Pentel's largest shareholder, into a subsidiary, making it effectively the largest shareholder. KOKUYO then proceeds to purchase more shares and announces a TOB to turn the company into a subsidiary.

KOKUYO has announced that it will acquire Pentel stock at 4,200 yen per share and raise its voting rights to over 50%, but Pentel will also approach Plus Co., Ltd., a major stationery company, about White Knight.

Although KOKUYO's purchase price was higher than Plus's purchase price of 3,500 yen per share, even when combined with its holdings, it was 45.6%, less than the majority. In order to make Pentel, an unlisted company, a subsidiary, the focus was on whether KOKUYO would be able to acquire the shares held by Pentel alumni and business partners.

Pentel's shareholders at the time were mainly former employees and business partners, so Pentel's management team tried to persuade them to sell at a positive price, and as a result of a series of back-and-forth battles, Kokuyo's hostile takeover failed. it's over.

7.2. Hostile takeover of Descente by ITOCHU Corporation (2019)

In January 2019, ITOCHU Corporation launched a hostile takeover bid against major sporting goods company Descente.

The two companies had such a close relationship that Itochu provided reconstruction support when Descente was in financial crisis twice in the past. Conflicts over management come to the surface.

Without contacting Itochu, Descente forced the former president of Itochu to resign and appoint someone other than the former president of Itochu. Furthermore, as a result of the intensifying conflict over the management of DESCENTE, Itochu announced a TOB offer to DESCENTE.

Itochu will set the purchase price of the shares at 50% more than the market price and begin the TOB. Because Itochu had originally been purchasing Descente's stock, the TOB was concluded in March without Descente being able to take any effective defensive measures.

This case is considered to be the first time that a hostile TOB was established between large domestic companies.

7.3. Hostile takeover of Solekia by Freesia Macross (2017)

In February 2017, Mr. Sasaki, chairman of Freesia Macross Co., Ltd., launched a hostile takeover of system developer Solekia Co., Ltd.

Fujitsu, which was approached by Solekia about White Knight, announced its participation in the TOB battle and announced a TOB of 3,500 yen per share, with Mr. Sasaki purchasing the company at 2,800 yen per share, for a total of approximately 2.5 billion yen. did. However, the TOB by Fujitsu ended up falling through due to the increase in the purchase price. As a result, Mr. Sasaki acquired 39.64% of voting rights and became the largest shareholder.

This case is considered to be a rare case in Japan where a hostile takeover was successful, defeating the white knight.

Above, we introduced hostile takeovers. Although hostile takeovers are not common in Japan, they are gradually increasing in number as the number of shareholders (activists) who proactively make recommendations to the management of investee companies increases.

For those facing a hostile takeover, there are several defensive measures available, but the damage to the company if they are implemented is by no means trivial. Therefore, corporate managers are required to manage with a sense of urgency and attentiveness so that they can always adopt a strategy of "winning without fighting."