Gauging the Impact of a Hostile Takeover on Stock Values

A hostile takeover occurs when a company is actively pursued for purchase against the wishes of the board of directors. The company that is up for sale is often vulnerable. Another company that is determined to take over can move from friendly to hostile in a matter of weeks. The board of directors may refuse to accept the other company, but the aggressor instead starts to buy stocks. The company intending to purchase may buy stock until they have the majority of the shares and are therefore able to force through the takeover. The takeover affects the value of stock differently and will depend upon the amount of stock being bought by the company.

During the Stock Purchase

When the company is busy purchasing stock, the value of the shares begin to rise. However, purchases that are very aggressive may trigger alarm bells, and investors may begin to pull out and begin to sell their shares for less than they are worth. If there are too many of these sales, there will be more stock supply that can be purchased. The value of the stock, in this case, plummets.

In addition, if word spreads that a hostile take over is occurring, the shares of a company will be sold very quickly. Some shareholders may not be able to sell their stock before the takeover occurs. Many investors lose a lot of money with takeovers this way.

Anti-Take-over Action

Another thing that can occur is that the vulnerable company will decide to take defensive action against the aggressor. This can take the form of a shareholder's rights plan. In a plan, stock holders have the option to purchase additional stocks at a discount. This can also discourage the ordinary investor and will drive down the share price. A good example is when Yahoo was opposing the hostile takeover by Microsoft. Yahoo's share prices fell from $118.75 to $6.78. At that time, no one wanted to purchase the stock anymore because the price was too low.

After the Take-Over

When the company succeeds in its hostile take-over bid, then some form of stability may return to the market. Share prices may start to rise as confidence builds about the new owner. If there has been a shareholder's rights plan invoked, then these shares may struggle to rise, and shareholders will be unable to gain the usual rewards of a successful takeover bid.

In addition, the takeover may have been hostile because the aggressor company did not want the business. They may instead have been seeking assets, or attempting to get rid of competition. In this case, the company will be stripped of its assets, and then disbanded. Any shares in the company are either absorbed into the aggressor's business or lost completely. Hostile takeovers are dangerous to the vitality of a company because when another company owns it, anything can happen.

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