This week we are talking about Hostile Takeovers. Watch now!
Hostile Takeovers are an interesting situation in business. A hostile takeover occurs when someone buys a business that does not want to be sold. If you think about it, that is a very bizarre situation. Businesses are bought and sold all the time, but usually the business wants to be sold. This is a situation when the business does NOT want to be sold. It is important to understand how this can happen. I think you will find that hostile takeovers teach us some important lessons about business.
Let us start with the corporate structure. Publicly traded corporations issue stock, and the percentage of stock you hold is your percentage of voting rights. If you own 25% of the stock, you have a 25% vote on major company issues. It is not practical for stockholders to make the day-to-day decisions of running a company, so the stockholders select a board of directors to run the corporation. The stockholders choose the board of directors, and the board of directors hires the CEO. There are different variations on this structure. For instance, a corporation can issue different types of stock with different levels of voting rights. But this is the general corporate structure.
The point is that the CEO has to answer to the public. A publicly traded company has issued investment opportunities where the public can participate. The public is buying and selling company stock. The CEO has a responsibility to the public for how they are running the company. And if the public does not like what the CEO is doing, they can get rid of them with their vote. The shareholders can vote to change the board, and the board can fire the CEO.
The tricky thing is the CEO has a lot of influence over the process. The CEO usually sits on the board. And the board members are who select new potential board members for the shareholders to vote on. So from a practical standpoint, the CEO can influence the process in many ways to ensure they stay in power.
What happens in a hostile takeover? In a hostile takeover, someone wants to buy the business. You can do this in two ways:
- Offer to buy the company outright. If you know the stock price, you can calculate the value of the company. If you can get financing from a bank for the whole amount, you can go to the stockholders and ask them to sell you their stock.
- Purchase a portion of the company stock. You do not have to buy the whole company. If you purchase enough voting rights, you can fire the CEO and put your own team in place.
The interesting thing to realize is that there are a lot of people involved. We tend to think of the CEO as running the show. But you can get into situations where some people want change and some people do not. In a hostile takeover, someone comes in and wants change, and if they get enough people on board, they can make change happen whether the CEO wants it or not. Because in most situations, you only need 51% of the vote to buy a company.
What you need
In business history, there are a lot of different examples of hostile takeovers. When you look at these examples, you will notice three things that they all have in common. You need these three things to pull off a hostile takeover.
- Hated CEO. This is perhaps the most important. If you have a CEO that everyone loves, you are not going to achieve a hostile takeover against their wishes. The board will listen to the CEO and not you. You want to find the most hated CEOs in America. Those are the CEOs that will not have the support from their board. Lesson: It is important that people like CEOs, because you will need people to stand by you during a takeover threat.
- Poor performance. You need to find a company that is underperforming. An example of this would be a well-known company with a great product that generates a loss every year. And you look at this company and it boggles your mind why they are not generating a profit. That is an underperforming company. You can identify this by looking at the competitors. If the competition is doing well and you are not, the company is under-performing. That creates an opportunity for a takeover threat to come in offering to improve performance. Lesson: It is not enough for CEOs to just be nice, they have to deliver results.
- Strategic plan. You need a strategic plan. You need some way to communicate to the shareholders that if they vote with you, you have a plan to make them more money. How are you going to make the company better? Are you going to have a better capital structure? Will you do better marketing? Will you expand to new sectors? Ultimately, this is about money. The shareholders made an investment in this company. They want to know, how you are going to increase the price of their shares. Lesson: For a hostile takeover, it is not enough to say someone is doing a bad job, you need a specific plan of how you would do the job better.
To recap, if you are planning a hostile takeover, you need these three things: a hated CEO, poor performance, and a strategic plan. If you look at the business landscape today, there are some prime takeover targets. I am not going to mention any names. I will leave that up to you. Even if there is a division of a larger publicly traded company, you could go after that business. If that business division is underperforming, they are destroying value for all the shareholders.
The most important idea I want you to understand about hostile takeovers, is that it is all about productivity. Productivity is the true driver in business. It is the driver of stock price, and the driver behind shareholder voting. In a hostile takeover situation, the productivity of a business has gone down. That opens the door for takeover threats. All a hostile takeover is doing is someone is coming in and saying they can do things better. Understanding the productivity of your business is important for your future success.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.