What’s so hostile about a corporate takeover?

June 23rd, 2009

Normally, someone can’t buy something from you without your permission – a guy can’t just walk into your living room, throw down a wad of cash, and make off with your sofa. You’d expect the same principle to apply to corporations: if you own a company, how can someone else buy it if you won’t sell it to him? But depending on the type of company you own, another individual or corporation can actually buy it without your permission, in a maneuver called a hostile takeover.

If your company is private, you don’t have to worry about hostile takeovers, because the company’s owners (you/your partners/your fellow members on the board of directors) have a controlling interest in the stock. But in a public company, although the board of directors may have the single biggest chunk of shares, the majority of the shares are dispersed among the general public. Think of each share as something like a vote. If someone wants to become the owner of your company, all he has to do is collect the most votes – it doesn’t matter if he has your votes or not, as long as he has more votes than you do. So what he can do is appeal to the public, and offer to buy their votes (their shares) for a higher price than they could get for those shares on the stock market. If enough shareholders take him up on his offer, the company becomes his – in other words, he’s completed a hostile takeover. So it turns out that in the world of finance, people can actually buy something of yours… whether you like it or not.

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