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The Return of the Hostile Takeover

When looking at the past several months, it is clear that unsolicited bids are on the rise and the wars that ensue are far from pretty.  This past April, Endurance Specialty Holdings made a public offer for Aspen Insurance Holdings after Aspen “refused to engage at all” to friendly negotiations.1 Up until late May, Pfizer had been relentlessly pursuing its UK competitor, AstraZeneca, for months.2 Time Warner fought off a bid by 21st Century Fox3 by amending its bylaws,4 but ultimately sold to Comcast in February.5 The most recent of these unsolicited offers, the possible acquisition of Allergan (the maker of Botox) by Valeant Pharmaceuticals, is also the by far the ugliest.6  Last week, Valeant released a number of written exchanges between the two companies to the media.7 The letters reveal Valeant attempting to engage Allergan in friendly negotiations, while at the same time making abundantly clear that Valeant will continue to pursue a hostile takeover whether Allergan wants to be acquired or not.8 Allergan continues to push back against the hostile takeover by criticizing Valeant’s business model and calling the offer “grossly inadequate.”9

Although bigwig execs bickering with each other in the press can be entertaining, the real question is why hostile takeovers seem to be making a comeback and what this means for shareholders.

The Bull Market

One obvious reason for the rise in hostile takeovers is economic growth.10 Steady growth makes directors more confident in using unsolicited bidding as a means of growing their current company.11 Economic growth, in addition to increasing confidence, also increases the money that companies have “to go shopping with.”12 What makes these unsolicited bids particularly hostile is that the target companies are fighting back.13 Target companies are experiencing the same benefits of economic growth and thus have consistently attempted to fight off unsolicited offers by claiming that the bid “substantially undervalues” the true worth of the target company.14

Changes in Corporate Governance & Shareholder Activism

Two closely related trends, changes in corporate governance and shareholder activism, have made companies more vulnerable to hostile takeovers. Activist shareholders have made powerful changes to corporate governance rules by adopting proposals that make it easier for shareholders to replace directors.15 For example, the number of S&P 500 companies that allow shareholders to call special meetings, instead of having to wait for the annual meeting to replace leadership, has increased 23% since 2002.16 Additionally, there are now fewer boards with staggered terms.17 As one commentator has written, “the key to being able to complete a hostile bid over the directors’ objections is the ability to have shareholders replace a majority of the board.”18

What Does This Mean for Shareholders?         

Hostile takeovers translate into greater uncertainty for shareholders.19 Companies that wage war via hostile takeovers expend a lot of resources in a fight where success is never guaranteed.20 Hostile mergers are typically horizontal mergers, which means that even if the buyer ultimately succeeds and acquires the target, there may still be antitrust rules that get in the way.21 The takeaway for shareholders however, is that the buyer’s stock tends to go down and the target’s stock tends to go up, at least in the short run.22 For example, AstraZeneca’s shares increased 18% and Pfizer shares decreased 5% after Pfizer made public its bid for the UK company, Time Warner shares increased 22% and 21st Century Fox shares went down 9.8% after it made its bid for Time Warner, and Allergan shares increased 18% and Valeant shares fell 8.2% after Valeant’s offer went public.23 Although this kind of fluctuation may leave shareholders uncertain about the future, at least in the case of Time Warner and Pfizer, the shares went back to previous levels once the offers were abandoned.24

  1. David Gelles, Valeant Switches to Sugar, but Allergan Still Not Biting, N.Y. Times DealBook (Sept. 24, 2014, 12:06 PM),

  2. Drew Armstrong and Simeon Bennett, Pfizer Ponders Next Move After AstraZeneca Bid Rejection, Bloomberg (May 26, 2014, 7:01 PM),

  3. Martin Peers and Keach Hagey, Fox Withdraws Time Warner Bid, The Wall Street Journal (Aug. 5, 2014, 6:30 PM),

  4. See Ronald Barusch, Dealpolitick: Time Warner Buys Time—Or Does It?, The Wall Street Journal (July 22, 2014, 2:45 PM),

  5. Shalini Ramachandran and Dana Cimilluca, Comcast Acquiring Time Warner in All-Stock Deal Worth $45 Billion, The Wall Street Journal (Feb. 13, 2014, 12:12 PM),

  6. See Gelles, supra note 1. 

  7. Id. 

  8. Id. 

  9. Id. 

  10. David Weidner, The Art of No Deal: When Investors Get Caught in Hostile Territory, The Wall Street Journal (Aug. 14, 2014, 1:34 PM),

  11. See David Gelles, Hostile Takeover Bids for Big Firms Across Industries Make a Comeback, The New York Times DealBook (June 12, 2014, 8:25 PM),

  12. Weidner, supra note 10. 

  13. Gelles, supra note 1. 

  14. Id. 

  15. Liz Hoffman, In Allergan Case and Others, Hostile Bidders Are Making the Most of Firms’ Weakened Defenses, The Wall Street Journal (Aug. 25, 2014, 5:13 PM),

  16. Id. 

  17. Gelles, supra note 1. 

  18. Barusch, supra note 4. 

  19. Gelles, supra note 1. 

  20. See id. 

  21. Id. 

  22. Weidner, supra note 10. 

  23. Id. 

  24. Id.