Takeovers; Hypothesis, Justification and Defences


Elon Reeve Musk, an entrepreneur, investor, businessman, founder, CEO and Chief Engineer at SpaceX – early-stage investor, CEO and Product Architect of Tesla, Inc. with an estimated net worth of around US$273 billion (dubbed as the world’s wealthiest person according to Forbes real-time billionaires list and Bloomberg Billionaires Index),[1] has been making rounds in the news for launching a hostile takeover bid of Twitter at a $43bn valuation.

This has expectedly steered up a lot of discourse about Takeovers, and literature abounds discussing what it is and what it is not. This short article discusses the hypothesis, justification and defences for hostile takeovers generally without much regard to the Elon Musk and Twitter Saga.

Generally, when an investor seeks to gain control over a corporation, they achieve this via a friendly takeover, hostile takeover, reverse takeover, or a backflip takeover. Friendly takeovers are negotiated takeovers, as it involves a series of negotiation between the acquiring investor(s) and the target board. In this type of takeover, the shareholders of the target company receive cash and/or shares in the acquiring company as part of the package. This type of takeover is free from controversies as the name suggests.[2]

Hostile takeovers are attempts made by acquiring investor(s) towards gaining control by employing different models or methods. This can be by direct negotiations with the shareholders (as opposed to the board), or the discreet purchase of shares of the target company. Hostile takeovers may come as a result of a failed negotiation of a friendly takeover attempt as is the case with Elon Musk and Twitter. Hostile takeovers have been suggested as the most effective way of getting rid of non-performing managers without having to bribe them out.[3]

Due to the direct negotiation between the investors and the shareholders of the target company, hostile takeovers have the tendency of promoting private benefits to the negotiating parties as opposed to conferring any social value. They can lead to a renegotiation of contracts of labour and employee dismissal, opposite to the theory of a company as a nexus of contracts. Hostile takeovers represent a control battle between incumbent managers, shareholders and outside investors. A reverse takeover involves the shareholders of a private firm purchasing a large majority of the stock of a public company for the purpose of gaining control. It is used by private companies to get public company status without the hassles of re-registration. Lastly, a backflip takeover happens where an acquiring company becomes the subsidiary of the acquired company. This occurs where the acquired company, although having goodwill and standing in the market, runs into financial difficulties.


The takeover hypothesis highlights the place of takeovers and their implication for companies, shareholders and other stakeholders. Amongst the hypothesis, we will look at the disciplinary, synergetic gains and hubris hypothesis.

The disciplinary hypothesis

As takeovers often involve the booting out of the incumbent managers of the target company, it is said to be a mechanism for replacing inefficient managers, and other than that, when takeovers occur, the usual contract of continuous employment is terminated. The disciplinary hypothesis promotes the view that the value of the target company is likely to be enhanced where there is a threat of takeover by a raider, who actually knows that the present economic value of the company can be maximised and improved with better management.[4] The disciplinary hypothesis is often linked with hostile takeovers because of the absence of negotiation leading to the takeover, especially with regard to job security and/or compensation.

Expectedly, managers tend to oppose these bids because they stand to lose their roles. There is however a contention that little empirical evidence supports the hypothesis that disciplinary takeovers are found only in hostile takeovers. It has been argued that the post-takeover management turnover associated with a hostile takeover is not related to performance, but that such management overturns, by way of resignation or dismissal, is possibly due to differences in the bid price of the takeover and/or future expected performance of the target company[5].

Despite the lack of agreement that the disciplinary hypothesis is responsible for managerial turnover, the effect of takeover activities on target companies, especially its disciplinary role, cannot be denied. Whether the replacement of the managers of the target company is as a result of inefficiency, or disagreement during negotiations, a takeover has a disciplinary feature; it provides an opportunity for the shareholders of the target company to show that the property rights in their shares can be exercised as they deem fit.

The synergy hypothesis

The synergy hypothesis suggests that takeovers are a product of the desire to create and maximize value, through an amalgamation of resources of the acquiring and target companies. This is done in such a way that the value of the combined entity is superior to the individual sums of the merging entities. This involves operating, managerial and financial combinations.[6]

This hypothesis, as the name suggests, identifies takeovers as a means for corporate expansion, and value creation, through negotiated agreements by the management in favour of the shareholders. In light of this, there are assumptions of takeovers being motivated by synergistic gains. One assumption is that, since the combination is aimed at enhancing value, even more than the previous values individually combined, there is an implied belief that the target company is performing well with regard to return on investment. Secondly, due to the involvement of mutual negotiation by the management of the target company and the acquiring company, it is a friendly, and not a hostile takeover.

Also, if the management of target companies of synergistic companies are doing well with regard to expected returns, it follows that the management is performing efficiently. This is consistent with the theory that the market dislikes buyers who remove target management, since such managers achieve economic growth.[7] Synergies of this nature, have been argued to have the probability of creating more value where the acquiring company and the target company are in the same line of business.

However, it remains a probability because evidence has shown over time, that synergies between unrelated companies can lead to higher returns for the shareholders of both companies than that of related companies[8]. We can thus conclude, or suggest that the findings on the effect of relatedness of post-acquisition performance are inconsistent.

The Hubris Hypothesis

It has been the case many times that takeovers may record insignificant or no gains post-takeover. This could be as a result of many factors, key among which overestimation of the bid price is one. When this happens, it is often referred to as the hubris hypothesis of takeover. The implication of this is that – the average increase in the market value of the target company should offset the average decrease in the acquiring company’s value, in a way that produces a non-positive combined gain of the values of both companies.[9]

Since acquisitions are primarily geared toward improving the value of the companies, corporate managers pursuing takeovers have a fiduciary duty to measures that will ensure the post-takeover value of the company increases. However, where managers abandon or derelict from this duty, using the cloak of synergy to pursue takeovers, the chances of loss of value post-takeover becomes highly likely.

It has been recorded that complacency, arbitrariness and arrogance on the part of managers who have recorded successes in their careers, previously account for them taking less care in properly evaluating and examining takeover bids, to ensure success. This causes managers to callously overestimate the synergistic gains of a takeover, thus leading to hubris.


Takeover defences are broadly classified into pre-bid and post-bid defences[10]. Pre-bid defences are employed by managers before any official bid is made to the company. This is to prevent a successful takeover of the company, and include, but are not limited to – poison pills, staggered boards provision, fair price amendment, super majority provisions and golden parachutes. Some of these defences are often referred to as ‘shark repellents’. Post-bid takeovers are employed after the official bid has been made, and this includes – white knight and white squire, crown jewel, greenmail and standstill agreement, and Pac-Man defence, among others.


  • Poison Pill:

Poison pills are strategies deployed against hostile takeovers, to make them unattractive and expensive. It includes the issuance of stock warrants or rights, which allow shareholders of a target company to buy shares at a substantial discount from the market price. This right becomes exercisable when an acquirer buys more than a certain percentage of shares in the target company, preparatory to a takeover bid. These warrants or rights also allow the target’s shareholders to purchase shares of the newly formed company at a discount, if the acquisition is successful. When it is exercised before the acquisition, it is referred to as flip-in, where it is exercised after the acquisition it is referred to as a flip-over.

  • Staggered Boards:

Staggered Boards are usually incorporated in a company’s constitution (MEMART), to ensure the majority of members of the board of a company are unavailable for election during election period. The board may be classified into three sub-groups, and only one of the sub-groups is eligible for annual election. This makes it cumbersome for a hostile bidder to gain immediate control of the target company.

  • Super Majority:

This puts a high threshold for the amount of shares a bidder must acquire before any merger or acquisition is possible.

  • Fair Price:

This comes after the relaxation of a super majority, but it requires a bidder to pay all the shareholders of the company an equal price per share.

  • Golden Parachutes:

This device is included in contractual arrangements between managements and their companies. It entitles the management to large forms of compensation in the event of loss of office. The compensation to be paid could be so large that it may discourage an acquirer from taking over a company, especially where it would lead to the dismissal of the management.


  • White Knight and white square:

With this strategy, the target company invites another friendly company to make a bid towards acquiring the company, to prevent the hostile acquirer from acquiring the company. White square is another version of the white knight, as the invited company is only invited to purchase a large percentage of share in the target company called a ‘corner’, used to vote against the hostile acquirer’s takeover bid.

  • Crown Jewel:

A target company sells its important assets to another company to become less attractive to the acquirer. Sometimes the assets are sold to a white knight for a possible repurchase at an agreed price after the acquirer withdraws its bid.

  • Greenmail and standstill agreement:

This is a defence tactic in which the target company repurchases a certain number of shares from its shareholders, usually at a premium to prevent the hostile bidder from acquiring a major percentage of the company’s stocks. It is usually followed by a standstill agreement in which the shareholders agree not to rebuy any shares in the company for a given time.

  • Pac-Man defence:

The target company makes a counter move and starts acquiring shares in the company that has placed the bid.


Although it seems that there is a disparity of interest between management (board) and Shareholders, resistance to a takeover by management may increase Shareholder value via competitive bids, producing a situation where bid premiums are improved, higher bargaining power reached and more incentive for management.[13]

A higher premium may be sustained only where the bid is successful. Thus, considering the intensity of some of the defences, there is the general presumption that management seeks to frustrate the takeover for their own interests, to remain and entrench themselves in office.


  1. https://en.wikipedia.org/wiki/Elon_Musk
  2. Randall Morck, Andrei Shleifer, and Robert W. Vishny, ‘Characteristics of Targets of Hostile and Friendly Takeovers’ in Alan J. Auerbach (ed.), Corporate Takeovers: Causes and Consequences (Chicago), IL, University of Chicago Press, 1988) 102
  3. Andrei Shleifer and Lawrence H. Summers, ‘Value Maximization and the Acquisition Process’ (1988) 2 Journal of Economic Perspectives 7, 11
  4. David Scharfstein, ‘The Disciplinary Role of Takeovers’ (1988) 55 The Review of Economic Studies 185, 192.
  5. See generally Omesh Kini, Wiliam Kracaw, and Shehzad Mian, ‘The Nature of Discipline by Corporate Takeovers’ (2004) 59 The Journal of Finance 1511, 1549
  6. Roberta Romano, ‘A Guide to Takeovers: Theory, Evidence and Regulation’ (1992) 19 Yale Journal on Regulation 119, 125-128
  7. John G. Matsusaka, ‘Takeover Motives during the Conglomerate Merger Wave’ (1993) 24 The Rand Journal of Economics 357, 358, 373-376
  8. See Sayan Chatterjee, ‘Types of Synergy and Economic Value: The Impact of Acquisitions on merging and Rival Firms’ (1986) 7 Strategic Management Journal 119. 129-130;
  9. Richard Roll, ‘The Hubris Hypothesis of Takeovers’ (1986) 59 The Journal of Business 197, 201-203.
  10. See Richard S. Ruback, ‘An Overview of Takeover Defences’ in Alan J. Auerbach (ed.) Mergers and Acquisitions (Chicago, University of Chicago Press, 1987) 49, 53-64.
  11. Francis Okanigbuan Jnr, ‘Corporate Takeover Law and Management Discipline’ (2020) Routledge Research in Corporate Law 52. 56-59
  12. Richard S. Ruback, ‘An Overview of Takeover Defences’ in Alan Jung, ‘Growth, Corporate Profitability and Value Creation’ (2002) 58 Financial Analysts Journal 56, 65.
  13. Peter Holl and Dimitris Kyriazis, ‘Agency, Bid Resistance and the Market for Corporate Control’ (1997) 24 Journal of Business Finance & Accounting 1037, 1060 – 1063;

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