How Hostile Takeovers Work

Who Benefits from a Hostile Takeover?

While companies fight tooth and nail to prevent hostile takeovers, it isn't always clear why they're fighting. Because the acquiring company pays for stocks at a premium price, shareholders usually see an immediate benefit when their company is the target of an acquisition. Conversely, the acquiring company often incurs debt to make their bid, or pays well above market value for the target company's stocks. This drops the value of the bidder, usually resulting in lower share values for stockholders of that company.

Some analysts feel that hostile takeovers have an overall harmful effect on the economy, in part because they often fail. When one company takes over another, management may not understand the technology, the business model or the working environment of the new company. The debt created by takeovers can slow growth, and consolidation often results in layoffs.

Another cost of hostile takeovers is the effort and money that companies put into their takeover defense strategies. Constant fear of takeover can hinder growth and stifle innovation, as well as generating fears among employees about job security.

Ultimately, we must measure the costs of mergers and acquisitions on a case-by-case basis. Some have been financial disasters, while others have resulted in successful companies that were far stronger than their predecessors were.

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