To convince shareholders to sell their shares, the tender offer price is usually set at a significant premium over the current market price (frequently 50 percent or more).
Prior to announcing a tender offer, a raider will often purchase shares in the open stock market at prevailing market prices.
In a practice known as “greenmail,” the target might buy back its shares from the raider at a premium.
Thus, a failed hostile takeover could easily leave the target firm weaker, both competitively and financially, than prior to the bid.
According to his theoretical premise of a market for corporate control, stock prices are not only efficient but they also provide a critical indicator of managerial effectiveness.
When a company’s share price falls relative to the overall market, it signals that the firm’s managers are underperforming.Regardless of whether managers are underperforming due to incompetence or self-interested behavior, the market for corporate control promises that the fault will become readily apparent via the firm’s share price.Conversely, critics of hostile takeovers argue that the practice forces managers to focus too narrowly on short-term stock performance to the detriment of long-run shareholder value.Companies can take several precautionary steps to curb the threat of a hostile takeover.The most famous anti-takeover measure is the “poison pill,” which was first conceived by the attorney Martin Lipton in the 1980s.While there are many variations, the basic poison pill grants shareholders the option to purchase additional shares at a significant discount in the event of a hostile takeover bid, thus diluting the raider’s ownership and making the acquisition more costly.Firms can also implement a “staggered board” in which directors serve multiyear terms with only a portion of members coming up for election each year.Raiders may also initiate a proxy contest, an attempt to convince target firm shareholders to replace existing board members with a new group that will approve the acquisition.While tender offers and proxy contests can be used in tandem, they are often regarded as alternative mechanisms for accomplishing hostile takeovers.Empirical evidence suggests that proxy contests are more prevalent when there is greater evidence of managerial ineffectiveness, as measured by stock market performance and return on assets.Tender offers are used more frequently when the target is highly leveraged.