Last week, the drug companies American Home Products and Warner-Lambert agreed to a $72 billion merger. Hours later, Pfizer, another drug company, launched an $82 billion hostile takeover bid for Warner-Lambert. What makes some takeovers hostile? And how do they work?
In a friendly takeover, the management teams of the acquiring and target companies negotiate the terms of the deal–covering issues such as how shares in the new company will be divided–and then both companies’ boards of directors and shareholders approve it.
A takeover is deemed hostile when the target company’s management objects to the deal. (This is the case with Warner-Lambert, which quickly rejected Pfizer’s takeover bid. Pfizer has since filed suit to block the AHP-Warner merger.) In a hostile takeover, the acquirer can take control of the target company’s management one of two ways: a tender offer or a proxy fight.
In a tender offer, the acquirer offers to buy shares of the target for more than the market price. Individual shareholders then decide whether to sell their holdings; if the acquirer doesn’t win a controlling stake, the offer is rescinded and the shares returned. In a proxy fight, the acquiring company asks shareholders for their “proxies”–that is, the right to vote in their stead in management elections. The acquirer promises to replace the board of directors that rejected the merger with one that would approve it. As in a tender offer, shareholders are guaranteed profit–either through cash payments or more shares in the new company–if the takeover is successful.
Although Pfizer has not officially made a tender offer or begun a proxy fight, it has made clear to Warner-Lambert shareholders that they would benefit financially from the deal: Pfizer would offer them 15 percent more per share than AHP. (Click here to read Slate’s “Moneybox” on why these mergers don’t usually create the value investors expect.) But AHP and Warner have tried to prevent such an offer from ever reaching shareholders by including a $2 billion breakup fee in their agreement. This provision requires any company that thwarts the marriage by acquiring one of the partners to pay the other partner $2 billion. Pfizer is challenging the breakup fee in court, arguing that the companies’ boards neglected their obligation to pursue the best interests of the shareholders by undermining attempts at a hostile takeover.
Explainer thanks Prof. Adam Pritchard of the University of Michigan Law School.