Hostile Takeover -- the Modern

Hostile Takeover -- the modern business nightmare

Globalization means many fundamental changes to business practices around the world. Culture plays a significant role in defining standard business practices in a particular area of the world. As the world becomes more integrated, many businesses find themselves exposed to practices that are foreign to their culture. One of these business practices that are becoming more common is the take-over. When a takeover occurs, a bidder makes an offer to buy a company. This can be either friendly or hostile depending on the circumstances of the bidding process. This research will explore the legal, business, and political aspects of the hostile take-over.

A chose this topic because this practice is not common in my key area of focus. My academic focus is on Asian business, particularly the People's Republic of China. This practice is not a part of Asian business culture. The opportunity for a hostile takeover was not even possible in China prior to their decision to privatize business. In the past, the Chinese government owned many of the major business sectors. Sectors that were not privatized were under strict government control. The idea of a hostile take-over is a foreign concept in Chinese business. As they are exposed to western ideals and business practices, they must learn to assimilate this concept into their repertoire.

Changes in Chinese business culture are the key reasons for choosing to study the hostile take-over in light of globalization. China makes an excellent case for studying the effects of changing business practices in the face of greater international integration. Takeovers were not a normal part of Germany business culture prior to the formation of the EU. By comparing how these changes affected Germany and China, one could hope to gain insight into the affects of changing culturally significant business practices. The purpose of this study will be to use Germany and China as examples for the analysis of how changing global business practices affect businesses in those countries. It will use the hostile take-over as the lens through which to view these changes.

Significance of the problem

China and Germany provide excellent examples to view the affects of the hostile take-over and the affects on the companies involved and the political environment. Focusing on these problems will give the global business world a view of how global trends affect the individual players and the global business environment. As hostile takeovers become more prevalent in areas that had not previously experienced them there will have to be many adjustments in order to avoid conflict. Introducing the hostile take-over will mean making many legal changes, political changes and changes in ideology for everyone involved. The hostile take-over requires a highly developed level of negotiating skill. There is no doubt that the introduction of the hostile take-over the China and Germany will require many culturally significant business changes that could affect other areas of business culture as well.

Hostile takeovers are not the norm in China, and takeovers by foreign investors are a recent addition to the business structure in China. Germany has traditionally been a foreign investor in other countries, but it resisted the entrance of foreign investors into their own countries for nationalistic reasons. In some cases, the takeover can add the extra boost that a struggling company needs. There are times when a takeover has advantages for both companies. However, these types of takeovers are typically not hostile. In this case, the proper term would be a merger or partnership. A hostile takeover differs because one party does not accept the takeover offer. These scenarios can be predatory and highly destructive to the target company and the economy in general.

Company Self-Protection

The hostile take-over means the death of the company that is being taken-over. They will be liquidated and their assets integrated into the new company. This is something that no company wants for themselves. This study will shed light into the hostile take-over process and will offer companies some suggestions as to how to protect themselves from becoming a victim. It will examine the legal and business tactics used in countries where hostile takeovers are a common to devise a plan for avoiding hostile takeovers for companies in countries where they are not as common.

There are a number of tactics that can be used by the individual companies to make themselves less vulnerable to the hostile takeover. These tactics often include colorful names such as the "poison pill," "Nancy Reagan," and "Flip Over." Aside from their colorful names, these techniques can be applied to the target company to make them a less attractive target. These tactics will be discussed in Chapter II, as well as some examples of their use in action.

Government Protection against hostile takeovers

Hostile takeovers are not only a danger for the company that is being taken over, it can also pose a threat to national security. This is especially true in the face of a foreign hostile take-over. If the take-over occurs in a major business sector, it could have devastating effects on the economy. A foreign hostile take-over can be seen as foreign direct investment, which in many circumstances would be considered to be good due to the boost to the economy. However, in the case of a foreign hostile take-over, there is a loss of a domestic business. Therefore, the boost to the economy is negligible. Companies need to take measures to protect against hostile takeovers as a matter of national economic stability.

This study will examine the policies and situations in China and Germany regarding hostile takeovers in those countries. Hostile takeovers are becoming more popular and the number is increasing on a global basis. Countries need to develop strong policies to support the companies within them. The government has many options available to help protect the country from a hostile takeover that has a large-scale effect on the economy. This research will discuss a case in China where a foreign entity was able to gain a considerable market share of an entire sector, despite government controls to avoid such a situation. The Chinese Beer War is an excellent example of why governments need to devise strategies for protecting domestic companies from hostile takeovers.

Structure of the Thesis

This thesis will be a case analysis involving the methods, effects and remedies for hostile takeovers. It will focus on China and Germany. China will be an excellent target for study, especially where hostile takeovers of government-owned companies are concerned. Changes in the market system of China have opened up many opportunities for investment in the country. As a result, it has also opened up opportunities for predatory takeover attempts as well. Germany has not been the target of takeover attempts in the past due to their dual board system. A hostile takeover was too complicated in the past. Recently China and Germany have been the targets of hostile takeovers of several of their major businesses. This study will focus on the policies and procedures that are in place to control or prevent hostile takeovers. It will be divided into the following five chapters.

Chapter 1 will focus on gaining thorough understanding of the hostile takeover. It will analyze the various types of takeovers and their effects on the companies involved. It will also examine the macro effects on the economy. This chapter will examine several case studies and the effects that they had on the economic outlook.

Chapter Two will examine some of the strategies used to avoid hostile takeovers. It will discuss the pros and cons of each tactic. It will examine case studies where these tactics have been used, and their success at avoiding a hostile takeover. Chapter Three will examine how to decide which is of these methods is the best method for avoiding a hostile takeover. It will examine the many variables that could effect the success or failure of these tactics in various circumstances.

Chapter Four will discuss the necessity of government support through policy in protecting the companies within its boundary from a hostile takeover. It will focus on policy suggestions that will help governments devise policies to help thwart hostile takeovers within their boundaries. Chapter Five will summarize the findings and results of the study. It discusses the various findings of the research and its implications for companies and the countries in which they reside.

Chapter I - Introduction

Analysis of the Methods of Hostile Take-Over take-over occurs when one company (the bidder) purchases another company. There are two basic types of takeovers. In a friendly takeover, the acquiring company will inform the board of the offer beforehand. The company has the ability to accept or reject the offer. The shareholders and their equity is the key determining factor in many of these cases. A takeover is hostile under two scenarios. The first is if the board rejects the offer and the bidder continues to pursue the takeover anyway. The second scenario that is considered to be a hostile takeover is when the bidder fails to inform the board of the company beforehand.

Types of Takeovers

There are several consequences of whether a takeover is considered hostile or friendly. These consequences are more in the practical business realm than legal ones. Hostile takeovers are riskier for the acquirer than friendly ones. In a friendly takeover, the bidder will have a better chance to examine the company and its health. If the board is amicable to the situation, they will provide a full disclosure of the company's strengths and weaknesses. In a hostile takeover, the bidder only has access to publicly available information. There may be situations within the company that have not been disclosed. This can be good or bad depending on the situation. The acquirer might get a pleasant surprise, or they might find out that they have bought a sinking ship. Due to the risk involved in a hostile takeover, it is often more difficult to obtain financing than for a friendly one if the acquirer does not have sufficient financing on their own.

Hostile takeovers are different in private companies than in public ones. In the private company, the shareholders and board are likely to be one in the same. There will be no surprises and the decision to sell is often an agreement between the major parties involved. However, in a public company, the employees, managers and other entities might not know of the takeover until the deal is already complete. They might face layoffs and insecurity as a result of the action. A hostile takeover often produces fear in the company that has been acquired. This fear can affect production and the operating efficiency of the company. The efficiency of the company that is acquired might drop after the takeover is complete, creating another risk for the acquirer.

It is assumed that management in a company will act in the best interest of the shareholders, but this is not always the case. In a bankrupt company, the management might be acting in the interest of preserving their own assets. A hostile takeover allows the bidder to bypass many of the formalities that might stand in their way in this case. A company might be able to save itself through selling itself to a larger, more stable company. A hostile takeover is not always bad for the company. However, in some cases management might sell a failing company at a profit and keep the proceeds for themselves, without regard for the future of the company. Every hostile takeover situation is different and the outcome is highly dependent upon the players involved.

The most common scenario for a takeover is a larger company that acquires a smaller, or private company. The company to be acquired is often of lower value than the acquirer. However, in some cases the company is be acquired is of higher value. This is called a reverse takeover. The purpose of this type of takeover is for the private company to "float" itself. This allows it to avoid the expense of a conventional public offering. Takeovers can be a way to avoid the necessary legal complications involved in many standard business practices.

Financing for the takeover typically involves three forms. Many takeovers are cash, either from funds the acquirer already has on hand, or from a bank. The financing can occur via a loan note through the company itself. There are some instances where financing can occur through the issuance of shares with no other cash exchanged. All three of these forms of financing have their advantages and disadvantages from a tax and legal perspective. Tax and legal issues become quite complicated when the takeover involves two companies in different countries. This scenario is becoming more common as the world becomes more globally oriented. Currency exchange rates make a foreign takeover riskier than a domestic one.

There are many reasons why one company might wish to takeover another one. Some takeovers are opportunistic. The target company might be a good bargain and a moneymaker in the future. When a company enters into financial disrepair, another company might see it as good potential for the future. The acquiring company might see a way to fix the ailing company's problems and return it to profitability. In this case, the acquiring company feels that there is a significant chance for financial gain in the future.

Some takeovers are strategic in nature. The acquiring company may need the capabilities of the company being purchased. It might be to secure a supplier relationship or to allow access into a new market niche. A takeover involving a competitor will help to eliminate the competition and increase one's own market share. A merger of the two companies might be more profitable for both companies than if they continued to operate singly. There are many scenarios where a takeover represents a strategic move. Some companies were created to be takeover, providing quick cash revenue for their owners as opposed to long-term gain typically realized as part of a business venture.

Anatomy of a takeover

Takeovers, either hostile or friendly are a part of the business world. They are more common in the United States, the United Kingdom, and France. They happen rarely in Italy due to the historical tradition of large controlling families. These families typically have special voting privileges designed to keep them in control of the companies that they, or their ancestors built. Takeovers are rare in Germany because of the dual board business structure. In this structure, the shareholders elect members of a supervisory board, which then appoints and supervises a management board. The workers themselves often comprise a majority of the shareholders. This dual board system makes a hostile takeover difficult as it must be approved on many levels. Interlocking ownership sets, called keiretsu, prevent takeovers in Japan. In China, takeovers are essentially impossible as the state owns most publicly listed companies.

In Australia, recent foreign buyouts have results in U.S.$3 billion due to the purchase of four companies. The purchases have been made by companies that specialize in foreign buyouts. Recent takeover attempts place two of Australia's major retail chains in jeopardy of becoming foreign property. Coles Myer Ltd. And Colorado Group Ltd. have recently received buyout bids ("Waltzing Matilda," 2007). As one can see, the scale of foreign buyouts can have a dramatic effect of the competitive outlook in the retail sector. If these two companies come under foreign ownership it locally owned retailers would find it hard to compete. This could force native Australian retailers out of business.

In order to curtail misconduct, the buyout houses have formalized their code of conduct. However, there is little government support to make certain that they fulfill their promises. One of the key reasons for a lack of government support is that until recently, Australia was not a popular target for foreign investment. Currently, bidders in the Coles Myer buyout have combined forces, making them a formidable conglomerate ("Waltzing Matilda," 2007). If successful, this buyout would greatly impact the Australian economy through a loss of assets.

Buyouts are even newer to the Chinese marketplace. However recently, in an unprecedented move, China's Carlyle Group has received permission from Taiwan's regulatory bodies to purchase Eastern Multimedia Co. (EMC) ("Waltzing Matilda," 2007).

This is the first secondary buyout in China's history. The deal required a U.S.$1.5 billion to acquire 90% of the issued share capital of EMC ("Waltzing Matilda," 2007). A combination of Chinese and Taiwanese banks are financing the transaction. Both the Chinese and Taiwanese banking industries will benefit from this acquisition, but the Multimedia Industry in Taiwan will suffer from the takeover.

This takeover demonstrates how the takeover in one industry can benefit another. When one weighs the economic ramifications of this type of acquisition, a wholistic approach must be considered. The aggregate effects of the loss in the multimedia industry and the boost to the banking industry must be weighed in order to asses the affects of such a takeover. EMC is one of the largest cable operator's in Taiwan, with the largest number of subscribers ("Waltzing Matilda," 2007).

This will make a Chinese company the largest cable operator in Taiwan. The effects of this are yet to be seen.

Carlyle has a reputation for acquiring companies and then selling them for an almost immediate profit to another firm. In November of 1999, they acquired Taiwan Broadband Communications and sold it to Australia's Macquarie Bank for U.S.$870 million, reaping a ten-fold profit ("Waltzing Matilda," 2007). There are worries that Carlyle will do the same for EMC, resulting in the collapse of a major Taiwanese cable supplier. This is one of the key fears and concerns with hostile takeovers be foreign investment companies. They do not take over a company in order to run it in an efficient manner. They are only out for their own profit, regardless of the consequences for the company itself. This "shark-like" philosophy is one of the key concerns over the growing number of hostile takeovers on a global basis.

At the same time China is vying for top position in Taiwan's cable network, Chinas is also under a similar threat from U.S. investor Goldman Sachs. This experienced investment firm has offered U.S. $1.3 billion to take control of China Network Systems ("Waltzing Matilda," 2007). Another trend that has affected the Chinese economy is a sudden interest in foreign investment in shares of Chinese banks. Investing companies are adding Chinese banks to their portfolios in record numbers ("Waltzing Matilda," 2007).

For instance the International Finance Corp, has recently added United Rural Cooperative Bank of Hangzhou to its investment portfolio ("Waltzing Matilda," 2007)..

Investors are beginning to recognize the value and growth potential of rural business in China. This acquisition reflects a recognition of China's growing rural wealth. The best investments are no longer only located in the urban section of China. Where there is an increase in foreign investment, there is also an increased interest in takeovers of these companies as well. This is a growing concern that could threaten China's rural enterprise growth potential. Regulatory agencies in China recently failed to approve the purchase of 289 million in non-tradable shares of the Huaxi Bank by Singapore's Pangaea Capital Management ("Waltzing Matilda," 2007). The political atmosphere in China is much more strict than in other parts of the world. The Chinese government has much more review and approval authority than in capital market systems. It is yet to be seen whether China will lose its authority as it moves towards a more capitalistic market system.

Chinese Beer Wars

In June 2002, the Harbin Brewery Group listed on the Chinese stock exchange (Fortney, 2004). The Chinese beer market is one of the largest in the world. Although, many around the world do not associate China with a large beer market, it exists due to sheer volume. Listing on the Chinese stock exchange made the company an attractive target for takeover by another of the world's giants in the beer world, Anheuser-Busch. In May of 2004, Anheuser-Busch placed a bid to acquire 29% of SAB Miller, which is owned by the Harbin Group. This company was formed when South African Breweries bought out the Wisconsin-based Miller Brewing Company (Fortney, 2004). They quickly became a rival of Anheuser-Busch.

There are several reasons for this acquisition from the standpoint of the American brewing giant. The first is that it could profit from Harbin's recent entry into the northeast China market. Although SAB Miller only made a profit of $15 million in 2003 (Fortney, 2004), entry into this market could mean much more lucrative profits in the future. However, if a suitor waits too long, the price of the acquisition will go up in relation to growing profits. A more profitable company is work much more than a low profit company. Anheuser-Busch sees SAB Miller as a potential for future growth that is currently at a bargain basement price.

In addition to the lucrative northeast China market, this acquisition would establish Anheuser-Busch as an almost unrivaled market share leader on a global basis. It would help Anheuser-Busch to establish an almost unrivaled economy of scale. China saw this as threat to their well-being. Several technical difficulties arose with this takeover attempt. Breweries are one of those enterprises that are state-owned. A bid on a Chinese brewery was a bold move by Anheuser-Busch. Others did not even try it because they did not feel there was any chance the Chinese government would approve it (Fortney, 2004).

The Chinese beer market is unique. When economic reforms began in China in 1978, China had approximately 800 breweries nationally (Fortney, 2004).. However, they were typically local government enterprises. Only the Tsingtao Brewery had an established national identity (Fortney, 2004). This market was fragmented and like many of China's other sectors, it suffered from an underdeveloped infrastructure and national economy. Reforms in China have focused on correcting these insufficiencies, leading to the growth of Chinese national brand names. As this trend continues, Chinese companies will become increasing targets for hostile takeovers by foreign entitles. The amount of control that the Chinese government still maintains over state-owned enterprises will certainly be a deterrent, but this does not mean that it will be impossible to acquire a Chinese company.

Two other attempts to enter into joint ventures with other Chinese beer manufacturers have failed miserable. In 1999, Fosters' pulled out early with a loss of more than $125 million (Fortney, 2004).. Beck's left China soon after the failed Fosters' deal (Fortney, 2004). SABMiller learned from the failed strategies of its predecessors. It did not market its top brands such as Miller Lite and Miller Genuine Draft in China. Instead, it buys Chinese breweries and helps them upgrade their product line (Fortney, 2004). This represents a learning curve strategy and makes marketing sense.

Markets and brands are culturally sensitive. It is more difficult to introduce a product that is contrary or unfamiliar to a foreign market than to work with an established brand with which the people are familiar. This is the strategy taken by SABMiller, one that has result in control and management of 17 Chinese breweries (Fortney, 2004). This gives SABMiller access to at least 17 established niche markets. It has a number of brands under its belt, which also makes good risk management sense as well. If it fails with one brand, the losses will be smaller than if it had invested its entire funds into one brand. Wao Kee Tan, vice president of Interbrew summarized it as such,

In early days, operators just weren't sure they could run local brands, but they have since gotten the hang of marketing and distribution." (Fortney, 2004, p. 1).

This case demonstrates another aspect of the hostile takeover. If the acquiring company does not know the market into which they wish to enter intimately, it can spell disaster for both the acquiring company and the target company. SABMiller took the correct approach in allowing the experts in the local market to take the lead in the development process. The company taking over the smaller company must be familiar with marketing strategies and consumer preferences. The failed attempts to enter the market by Fosters' and Beck's demonstrates how important an understanding of regional marketing techniques is essential to the success takeover, regardless of whether the takeover is friendly or unfriendly. Misjudging the local market represents considerable downside risk for the acquiring company.

One of the key points of contention in these acquisitions is the amount of influence that foreigners have had on rule changes that make state-run beer companies more open to foreign investment. In the past, companies that were listed overseas kept control of their operations in Chinese state hands by retaining a majority of their own shared. This meant that they could not be listed and sold to foreign entities. This changed in November of 2002 when the government allowed shares held by state-run companies to be sold to foreigners (Fortney, 2004). Many felt that this created a high degree of vulnerability to hostile takeover of Chinese state enterprises.

SABMiller was one of the first to test this new change in regulatory policy. According to Carl Walter of JP Morgan China, the government does not consider the brewery industry to be a strategic industry in China, therefore it does not see foreign control of this industry as a threat (Fortney, 2004, p. 1). However, it would not be so lenient in those industries that it considers crucial, such as the power industry or other manufacturing trades. The leniency that the Chinese government gives to certain industries to open themselves to foreign investment depends on how critical the industry is to China's growth and stability. It still maintains control over a majority of its critical industries. For instance, Chinese regulation limits foreign investment in the domestic auto industry to 50% (Fortney, 2004). One cannot gain controlling shares of a critical industry such as this.

In March of 2004, SABMiller decided to test the waters of the new regulatory environment in China by asking for an additional 29% of Harbin Brewery's government owned stock (Fortney, 2004). This would have given them controlling shares and resulted in a hostile takeover a government-owned company. This would have also given them control over the nation's most popular brand, Hapi (Fortney, 2004). This time, it was Harbin that rejected the bid. This would have meant a loss of their market to t foreign entity. In May of 2004, SABMiller continued press for ownership. It won the right to buy the additional shares despite Harbin's protests. This represents a hostile takeover in the purest sense.

Eventually, Anheuser-Busch saw the promise and the potential market share in the acquisition. It entered a bidding war for shares against SABMiller. In the end, Anheuser-Busch won and offered to buy SABMiller's shares as well. This offer was approved and gave Anheuser-Busch 64.5% of Harbins' Shares ("Anheuser-Busch Wins Bidding for Chinese Brewery," 2004). Anheuser-Busch already owns 27% of the Chinese beer leader, Tsingtao and 98% of Wuhan International Brewing Shares ("Anheuser-Busch Wins Bidding for Chinese Brewery," 2004).

The case of the Chinese beer wars demonstrates how the hostile takeover by a foreign entity can rapidly spread until it represents not only the takeover of a company, but essentially the takeover of an entire business sector. The beer demonstrate the key reason for the protections suggested as a part of this research. This case demonstrates how prevention the hostile takeover should be a key concern for countries that are facing rapid globalization.

Alcan/Alcoa

The announcement of a hostile takeover can have a dramatic and immediate effect on the company's stock price. When Alcoa aluminum announced that it would make an offer of U.S.$74 per share for Alcan stock, it caused Alcan's stock surged upwards. However, it rapidly fell as it became apparent that Alcoa's bid was far below par for the smaller company (Perreaux, 2007). Alcan rejected this under priced bid by Alcoa on the basis that it failed to reflect the true value of the firm. Alcan's share price was currently at U.S.$88 as compared to the $US74 (Conte, 2007). Alcan Chairman, Yves Fortier stated it as such,

It does not adequately reflect the value of Alcan's extremely attractive assets, strategic capabilities and growth prospects, does not offer an appropriate premium for control of Alcan, and is highly conditional and uncertain," (Conte, 2007, p. 1).

This reflects the typical attitude of the acquirer and the company to be acquired. The hostile takeover is a negotiation, like any other negotiation. The buyer tries to get the cheapest price possible and the seller tries to get the most money possible. They must reach an agreement for the deal to work.

In this case, Alcoa based its argument on the strength in attaining market share that the merger would mean. However, Alcan felt that it was doing well enough on its own and feared that it would be swallowed alive if the deal went through (Conte, 2007). Alcan felt that its approach to creating shareholder value and Alcoa's methods for creating shareholder value were too different to reach a compromise from an operational standpoint. Alcoa saw the merger as a way to meet a surge in global demand for aluminum packaging products. It saw the acquisition of Alcan and the answer to meeting demand in the future (Conte, 2007). Alcan had an established global presence and this might have been an attempt to capture those markets. However, this was not stated in the takeover bid. Alcoa tried to emphasize the mutual benefits, while Alcan saw the downside of the union as well.

The Alcan/Alcoa case demonstrates the many nuances that are a part of the takeover process. In this case, it was not only about the money, it was a strategic move. There are many considerations in whether to make or accept a takeover bid. In this case, Alcoa might have had ulterior motives that it did not disclose in the process. Alcan felt that the merger would no be advantageous for reasons other than present value of the company. Alcan felt that it would be swallowed by the larger company and therefore decided to continue to work on expanding their market on their own.

The Alcan/Alcoa case presents many different aspects of a hostile takeover attempt. At the present time, companies that are not accustomed to dealing with hostile takeovers are not equipped to deal with them from a legislative standpoint. China is one such country that lacks the legal framework to facilitate and regulate hostile takeovers. One of the key concerns in China is whether the privatization of industry will lead to a diminished ability to regulate and prevent hostile takeovers. This would appear to be a valid concern when one considers the Anheuser-Busch case where one takeover led to another, resulting in a major loss of domestic ownership for the country.

Shanda and Sina

Shanda Interactive Entertainment online gaming company occurred 19.5% of China's internet media portal, Sino (CBR Staff, 2005). This represents the first hostile takeover bid between two Chinese-based rivals. His is important as it represents a change in ideology regarding hostile takeovers. Until this point, takeovers had been between Western firms and Chinese firms. The western firms clearly had an advantage as they are more experiences in the world of acquisitions and mergers. However, in this showdown, both of the companies are Chinese. Sina resisted the takeover bid, even though it caused an almost immediate 10% increase in share value for the company.