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I am sure most of us have been following this recent event of Microsoft planning to purchase Yahoo. News is all over that Microsoft may go hostile against Yahoo. In this case the company or more specifically its board of directors doesn’t want to be purchased but buyer company can do it. I will explain as to what exactly is hostile take over and how does it work.

What is hostile take over?

Take over is a corporate action where an acquiring company makes a bid for an acquiree.

A hostile takeover is an acquisition in which the company being purchased doesn’t want to be purchased, or doesn’t want to be purchased by the particular buyer that is making a bid. How can someone buy something that’s not for sale? Hostile takeovers only work with publicly traded companies. That is, they have issued stock that can be bought and sold on public stock markets.

Can Microsoft legally take over Yahoo?

Yes of course. Because Yahoo is a publicly traded company i.e. its shares are being listed at stock exchange, any body can buy it by purchasing majority number of shares.

How does it work?

Most large companies do not own a majority share of their own stock as in case of Yahoo. To see how Yahoo stock has been divided among individuals and companies click here.

Let’s say, Yahoo owns 30% of their stock with the other 70% being owned by individuals or companies, where each entity only owns 1% or less.
Microsoft can attempt a hostile take over by buying stock from all the individuals until they own more than the 30% of Yahoo stock.

What are different methods of hostile take over?

The two primary methods of conducting a hostile takeover are the tender offer and the proxy fight.

A tender offer is a public bid for a large chunk of the target’s stock at a fixed price, usually higher than the current market value of the stock. The purchaser uses a premium price to encourage the shareholders to sell their shares. The offer has a time limit, and it may have other provisions that the target company must abide by if shareholders accept the offer. This method is currently employed by Microsoft as they offered $44.6 billion which Yahoo hasn’t accepted. The dead line has already passed.

In a proxy fight, the buyer doesn’t attempt to buy stock. Instead, they try to convince the shareholders to vote out current management or the current board of directors in favor of a team that will approve the takeover. The term “proxy” refers to the shareholders’ ability to let someone else make their vote for them — the buyer votes for the new board by proxy. This is what Microsoft has said they will do in the coming days. Hostile take over through proxy can turn ugly trust me!

What options does Yahoo have?

Yahoo can prevent Microsoft from hostile take over by buying back their own stock from individual holders to increase their majority shares. Ideally owning 51% would ensure that no one could succeed in a hostile take over attempt.

“The Golden Parachute” is also an option. It’s a provision in a CEO’s contract .which states that he will get a large bonus in cash or stock if the company is acquired. This makes the acquisition more expensive, and less attractive.

Another option is staggered board of directors drags out the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered, so that some members are elected every two years, while others are elected every four.

And last but not least Yahoo can issue “Dual-class stock” will allow them to hold onto voting stock, while the company issues stock with little or no voting rights to the public. That way investors can purchase stocks, but they can’t purchase control of the company.

What options does Microsoft have?

The best Microsoft can do is to keep this in news and publicize this merger as much as possible. This will put up pressure which will ultimately result in buying majority shares from individuals. It has to convince individual share holders that selling their shares to Microsoft will result in benefit for all. This is a proxy war and any thing goes. If Microsoft is able to buy 51% shares then it’s game over for Yahoo!

Any past example of hostile take over?

The most famous recent proxy fight was Hewlett-Packard’s takeover of Compaq. The deal was valued at $25 billion, but Hewlett-Packard reportedly spent huge sums on advertising to sway shareholders. HP wasn’t fighting Compaq — they were fighting a group of investors that included founding members of the company who opposed the merge. About 51 percent of shareholders voted in favor of the merger. Despite attempts to halt the deal on legal grounds, it went as planned.

Another example would be of Oracle buying PeopleSoft that happened in 2004.