This installment of The Matt Allen Letter is free for everyone. If you would like to read about stock analysis, stock market analysis, and much more. You can subscribe here.
I have had multiple people ask me what a hostile takeover is? This term has been thrown around in the media recently due to Elon Musk’s purchasing 9.2% of twitter and with Elon Musk denying the board seat that twitter offered him. This has put Elon in a position to make a run at a hostile takeover for Twitter.
In fact, I sent out a low risk/high reward stock option play to our premium subscribers that I believe will have great success if a certain hostile takeover happens. You can view this play here.
In this newsletter, you’ll learn what hostile takeovers are, how they work, and what companies might do to prevent them.
During the 1980’s, Carl Icahn, one of the greatest investors ever, made a name for himself for being a corporate raider. Carl would use the controversial method of hostile takeovers to become a multi-billionaire.
Have you seen the movie famous movie Wall street with Michael Douglas?
The main character, Gordon Gekko, gives a powerful speech to the shareholders of Teldar Paper. In the movie, Gekko is attempting a hostile takeover of the company.
The speech is based on a speech that Carl Icahn gave to the shareholders of Trans World Airlines (TWA) in the 80’s.
Icahn was successful in his takeover of Trans World Airlines and this brought the term “hostile takeover” to the mainstream.
Since the 1980’s, Carl Icahn has accumulated a net worth of $16.7 Billion. The stock of his company, Icahn Enterprises, has CRUSHED the S&P 500 and most other stocks since 2000.
However, you better watch out when Icahn invests in your company because he might be looking to take it over.
One thing you have to remember about Icahn: he believes that he is looking out for the average Joe. He HATES c-suite executives who make tons of money for doing absolutely nothing and tanking the stock price.
In a traditional acquisition, one company wants to sell and another company works with that company to agree on a deal. Both sides end up happy aka a friendly takeover.
A hostile takeover occurs when a company is acquired without the approval of their CEO or board. A hostile takeover will happen either through a tender offering or a proxy contest.
For this to happen, an individual believes that a company has poor leadership, and the company is very undervalued because of this. The individual believes that if they took over the company that they would make the appropriate changes for the stock to reach it’s full value.
Let’s take the modern day (hypothetical) example of Elon Musk and Twitter. Their stock currently trades at $44 a share. Elon believes that their stock should be trading for around $75 a shares. (hypothetical)
Elon can go to the twitter leadership and offer to do a traditional acquisition. Let’s say that Elon offers the board $65 per share for the entire company.
For the example at hand, let’s say that Twitter leadership laughs him out of the board room. The traditional acquisition is officially of the table.
It is about to get ugly now.
A tender offer is when the hostile bidder bypasses the company’s leadership and offers to purchase shares directly from shareholders, usually for more than their current market value.
Each shareholder decides for themselves whether to sell their stake in the company. The bidder’s goal is to buy enough shares to have a controlling stake in the company.
Let’s use our Elon and twitter example again.
Remember when Elon got laughed out of the board room for offering $65 per share for the company?
If Elon chose to do a tender offer, he could go to each individual shareholder and offer them $65 per share of their company.
Remember, the stock currently sits at $44 a share so that is a 47.73% profit from the current price of the stock.
A proxy fight t is when the hostile bidder attempts to replace members of the target company’s board. The goal is to get enough members on the board who will agree to the sale of the company or a change in leadership.
If Elon decided to try this method, he would need for the twitter shareholders to vote with him to replace 6 of the 11 current board seats.
A proxy fight is very hard because the current leadership and board are going to have a significant amount of shares. This means that they are going to have a large voting power.
Historically speaking, the shareholders would also choose to vote with the current leadership.
An example of a proxy fight took place between Microsoft and Yahoo in 2008. Microsoft had offered to purchase Yahoo, which Yahoo’s board rejected because it felt the offer undervalued the company.
In return, Microsoft launched a proxy fight, attempting to nominate its own directors to Yahoo’s board. The takeover was ultimately unsuccessful when Microsoft abandoned its goal of acquiring Yahoo just a few months later.
One thing that you have to remember about hostile takeovers are that they are VERY ugly and sometimes VERY public. Carl Ichan compares it to war because the current CEO is trying everything that they can to save their job, while he is trying everything to remove him.
Many companies have developed defensive strategies to help prevent hostile takeovers. These strategies are known as poison pills are designed to make the takeover more difficult, more expensive, or less attractive to the hostile bidder.
The most common type of poison pill is known as a flip-in poison pill, which is automatically triggered when a hostile bidder gains a certain percentage of shares in the target company.
When triggered, this poison pill gives all shareholders except for the hostile bidder the right to purchase additional shares at a discounted price.
For example, if Elon buys up more shares of twitter at $44. A flip-in poison pill would allow current twitter shareholders to buy shares up at $22 and then they would automatically become worth $44. (I have no idea if twitter has this in place.)
This move dilutes the hostile bidder’s ownership in the company by flooding the market with shares. As a result, it becomes more expensive to take over the company.
There are tons of other strategies that companies can use to fight against a hostile takeover but this is a popular one.
I hope you enjoyed reading about hostile takeovers!
Talk to you soon!
Stay Hungry, Stay Long,