Hostile Takeover

What it is:

A hostile takeover is a type of corporate acquisition or merger which is carried out against the wishes of the board (and usually management) of the target company.

How it works/Example:

In a hostile takeover, the target company's board of directors rejects the offer, but the bidder continues to pursue the acquisition.

A bidder may initiate a hostile takeover through a tender offer, which means that the bidder proposes to purchase the target company's stock at a fixed price above the current market price. Another method of hostile takeover is acquiring a majority interest in the stock of the company on the open market. If that is impossible or just too expensive, a bidder may initiate a proxy fight, which means that the bidder persuades enough shareholders to replace the management of the company with one which will approve the acquisition.

Why it Matters:

Most acquisitions and mergers occur in the business world by mutual agreement -- both sides agree that all of the shareholder's interests are served best by the transaction. In those instances, both sides have a chance to evaluate the costs and benefits, assets and liabilities, and proceed with full knowledge of the risks and returns.

However, in a hostile takeover, because the management and board of the target company resist the acquisition, they usually do not share any information that is not already publicly available. As a result, the acquiring firm takes a risk and may unwittingly acquire debts or serious technical problems.

In addition, the loss of key managers and leadership within the company may cause a shakeup within the target company that may disrupt its operations and threaten its viability.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.