(
BUSINESS) when a corporate raider attempts to take control of a corporation against the will of the management. Takeover requires a leveraged buyout typically financed with
junk bonds.
HOW IT WORKS
The corporate raider requires a takeover vehicle to launch a hostile takeover. The takeover vehicle is usually another corporation controlled by the raider, although in recent years ESOPs have been used (e.g., Tribune Corp.,
2007). The vehicle buys up a lot of shares of the
target company's stock on the market, then announces it wants to acquire a controlling interest.
Management opposes the takeover
bid. It can (a) challenge the legality of the takeover, (b) adopt a charter that makes it hard for the takeover vehicle to run the company it's proposing to buy (a poison pill), (c) seek another buyer that is more favorable (a white knight), or (d) borrow a ton of money and buy so many shares that the stock price goes up.
The raider makes a
tender offer for the shares he doesn't own. At a certain point, he may acquire sufficient control that he can legally challenge the
target's management to step down.
WHAT CAN GO WRONG
The management can use (a) or (b) successfully, or it can use (e), viz., launch a hostile takeover bid of the
target vehicle. The raider can lose of lot of money if a lot of shareholders have accepted his
tender offer.
Prior to 1980, the hostile takeover was unknown; banks would
never lend money for such a scheme. For one thing, the risks were ridiculous. For another, "success" would hurt way too many
people.
Everything changed when
Michael Milken revolutionized the junk bond market, allowing raiders to attempt deals that violated sound business judgment. The defeated company was compelled to pay for its own conquest.
