by J. Janie Lipsmeyer

Created on: January 04, 2009   Last Updated: December 27, 2009

INTRODUCTION

It is not uncommon for companies to come together to form a completely new company with a new name and the other two companies cease to exist, or the two come together and the stronger of the two becomes the parent company while the other operates under it. The two (or more) companies may even form a partnership. The coming together may be friendly unions or takeovers. However, in the case of publicly traded companies the takeovers may not be so friendly and are referred to as hostile takeovers.

Both friendly and hostile takeovers involve the acquiring company and the target company. The acquiring company (or hostile company) is the company interested in purchasing (taking over) a desired company, the target company.

Hostile takeovers are likely to occur when a targeted company's stock is undervalued and not reaching its potential due to poor management. In a successful hostile takeover, the managers of the acquired company are usually dismissed or given lesser status positions. This very possibility gives managers a high motivation to take actions to increase stock prices.

The publicly traded companies are at risk because interested companies may acquire large amounts of their stock to gain a controlling interest in the targeted company. However, the target company management may not want the firm to be taken.

HOSTILE TAKEOVERS

Less than friendly situations can take place when:

-The acquiring company bypasses the approval of the target company's directors.

-Target company board of directors and management refuse to negotiate.

-The target company board of directors and management do not believe the acquiring company's offer is in the best interests of the target company's stockholders.

The acquiring company must then make its plea directly to the stockholders of the target company without that company's approval. The acquiring company requests that the target company stockholders exchange their shares for cash or securities. To avoid situations like this some companies actually have a policy of pursuing a target company only when a takeover is on friendly terms.

RESPONSES TO TENDER OFFER

When an acquiring company approaches the target company with its tender offer (take over bid) the target company may respond as follows:

-The target company may see the tender offer as favorable and will recommend to shareholders to take the offer.

-The target company may resist the offer and make a self-tender offer, which is an offer to acquire stock from its

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