Question

Suppose you are a shareholder in a company. The current stock price is $25.00. Another company is willing to purchase your firm and is offering $35.00 per share to do so. However, the management of your firm immediately begins to contest this hostile takeover bid asking shareholders to reject the offer.

• Provide one explanation for why management may be working against shareholders' interests and one explanation for how they may be working for shareholders' interest.

Answer 1

A hostile takeover is the acquisition of a target company by another company (referred to as the acquirer) by going directly to the target company’s shareholders, either by making a tender offer or through a proxy vote. This is a case of tender offer.

The goal of a tender offer is to acquire enough voting shares to have a controlling equity interest in the target company. Which means the acquirer needs to own more than 50% of the voting stock. If not enough shareholders are willing to sell their stock to a Company to provide it with a controlling interest, then it will cancel the tender offer.
Management is asking the share holders to reject the offer, it means management is against this hostile takeover.

why management may be working against shareholders' interests

The question here is, if hostile takeover happens, what negative impact does it creates to the shareholders.

Members of management might want to avoid acquisition, by working against the will of shareholders, because they are often replaced in the aftermath of a buyout. They are simply protecting their jobs. The board of directors might feel that the deal would reduce the value of the company, or put it in danger of going out of business.

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. However, 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. So the takeover might benefit the shareholders for a short term, however it is not favourable in long term equities investment.

how they may be working for shareholders' interest.

What holds good for any acquisitions, in general, applies to hostile takeovers too. Successful takeovers result in better use of an acquired company’s resources, higher profitability and enhanced returns for shareholders. To the extent that a shift in command infuses a firm with new ideas, generates dynamism and ups efficiency. So in short term the shareholders gain capital due to exponential increase in the share price, (there might be negative impact in a long term) however if the takeover goes well with the acquirer then it leads to better stability and financial returns.

---------------------------------

# Please upvote if the solution helps.

# You may use comments section to revert with additional queries if you have or if I have missed out on any aspect of your question

Thanks !