In the News
Paramount continues to pursue Warner Brothers Discovery, though management has clearly indicated the Netflix deal is in the company’s best interest.
At the same time, Cincinnati based Cintas Corporation has announced a third attempt to acquire Massachusetts-based UniFirst. Both companies provide employee uniforms and related services but in separate parts of the country.
What is the link between the two? They both involve using the tactic known as the hostile takeover.
Definition
A hostile takeover is an acquiring company seeking to obtain control of another company, often a competitor, against the recommendation of either senior management or the board of directors. The pursuer will sometimes appeal to the shareholders directly to force a vote on the bid.
This tactic was used by Standard Oil Company to acquire refineries a century ago. Since the Depression it was rarely used until the 1980s. The Reagan administration pursued deregulation, which led to a different, and sometimes aggressive, approach to corporate governance.
Anheuser-Busch
One that made headlines in 2008 was the acquisition of Anheuser Busch by Belgian-based InBev. It is now known as AB-InBev, which is now the world’s largest brewer. By the way, it was the world’s largest brewer PRIOR to the acquisition. During negotiations InBev promised not to close any breweries, but it did not promise to maintain current employees. As a result, some 1,400 jobs were eliminated—jobs perfectly legitimate one day were now gone the next day.
Analysis
In my opinion, hostile takeovers deviate far from the founding principle of capitalism. That principle is having an idea for a product and service and acting on it in an environment where those ideas can become real and make a profit. Having to battle competition is also part of this principle. Hostile takeovers are nothing more than a power grab meant to either dominate the market or specific companies.
Some may argue that they are pursuing growth. They also argue that some companies are bloated and inefficient and an outsider needs to come in and straighten things up. Nothing wrong with pursuing growth. But growth can (and should primarily) be pursued through internal research and development. As for inefficiencies, some companies may have them. But they should be urged to change through persuasion rather than bullying tactics. Some may not change, and they may fail. Business failure is also a principle of a capitalist economy.
How to stop this
Some pursued companies have adopted tactics known as a “poison pill,” meant to provide roadblocks. An example would be issuing additional shares to existing shareholders, thus making it difficult for the acquirer to obtain a majority stake.
The federal government could also create a law that would allow the victim to declare a hostile takeover has been pursued. The aggressor would then be prohibited by law from making any further attempt to acquire the other. If the victim does not declare, the pursuit may continue. This would allow the pursued to keep its resources and not waste either time or money with lawyers to try and fend it off.
Does this make sense?
Should this not be pursued?
