A hostile bid is an offer to purchase a company made against the wishes of the board of that company. Hostile bids can be conducted in a number of ways, depending on the strategy the acquiring company wants to use. If the bid is successful, the company will be sold whether or not members of the board are happy with it, typically at a very high price. Hostile takeovers can be conducted for a number of reasons, and boards are usually inclined to advise accepting offers to avoid a hostile bid situation.
One approach to take with a hostile bid is to make an offer for a company without consulting members of the board. While the board can advise rejection of the bid, shareholders can agree to sell their shares, allowing the acquiring company to take over. In other cases, board members are notified, they express their discontent, and the offering company moves forward on the hostile bid against their wishes.
One technique used is a proxy fight. In a proxy fight, the company trying to make an offer encourages shareholders to vote the existing management out in order to replace it with management more favorable to a takeover. Another technique is to buy up enough shares to gain control over the management, allowing for a change of management and forced sale of the company. Companies can also make public tender offers as hostile bids.
Making a hostile bid is not illegal or particularly unethical. It can, however, be unwise. When companies are sold with the consent of the board, the board members provide a great deal of important information to the acquiring company. With a hostile bid, the only information available is that in the public domain. In some cases, this may be enough to make an informed decision and to pay a fair price for the company. In other instances, a hostile bid may end with a nasty surprise for the acquiring company.
Shareholders can benefit from a hostile bid. Hostile bids usually result in an increase in the offering price, allowing people to make a premium above the regular sale price of their shares. Companies are forced to offer a premium in order to sweeten the deal for shareholders to convince them to revolt against the board. This can make takeovers very expensive and may potentially expose a company to significant financial risk by tying up resources in the takeover.