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Lesson Learn of the Impact of  Hostile Take Over

A hostile takeover refers to the acquisition of a company by another corporation against the wishes of the former. We call the company the target company, while the one executing the takeover is the acquirer. In a hostile takeover, the acquirer goes directly to the company shareholder or fights to replace management to get the acquisition approved. Approval of a hostile takeover is generally completed through a tender offer or proxy fight.

In 1974, the Philadelphia-based ESB (formerly known as the Electric Storage Battery Company) was the most significant battery maker in the world, specializing in automobile batteries under the Willard and Exide brand names and other consumer batteries under the Willard and Exide brand names the Ray–O-Vac brand name. Its 1974 sales were more than $ 400 million. However, the firm’s profits had been rising. In addition, its stock prices had fallen in response to a generally declining stock market. Several companies had expressed interest in acquiring ESB, but ESB refused all these efforts. 

On July 18, 1974, International Nickel Company (INCO) announced a tender offer to acquire all outstanding shares of ESB for $28 per share, or a total of $157 million. The Toronto-based INCO controlled approximately 40% of the world’s nickel market and was the largest firm in this industry. INCO saw ESB’s declining stock price as an inexpensive way to enter the booming energy field while helping smooth out the volatility of its sales. Unfortunately, the acquisition of ESB did not prove to be a wise move for INCO.

Since the takeover was an unfriendly acquisition, INCO lacked a detailed financial analyst using internal data. Before INCO acquired the ESB, the major reputable corporations did not participate in hostile takeovers. Suppose a major firm’s takeover overtures were rebuffed. Most significant investment banks refused to finance hostile takeovers.

At this time, the competition in investment banking was putting pressure on the profits of Morgan Stanley, INCO’s investment bankers. However, it was seeking additional sources of profits. Morgan Stanley was also concerned that it might lose a long-term client by refusing to aid INCO in its bid for ESB. Morgan Stanley, long known as a conservative investment bank, reluctantly began to change its posture as it saw its market share erode owing to the increasingly aggressive advance of its rival in the investment banking business.

ESB found itself unprepared for a hostile takeover. Given the novelty of this type of action, INCO gave it only a three-hour warning of its “take it or leave it to offer.”ESB had installed some antitakeover defenses, but they proved most ineffective. It sought help from the investment Bank of Goldman Sachs, which tried to arrange a friendly takeover by United Aircraft but refused. By September 1974, the firm completed INCO’s hostile takeover of ESB. 

The takeover of ESB proved to be a poor investment primarily because INCO, owing to legal action associated with antitrust consideration, was not given a free hand to manage the company. Only 39 months after INCO had completed the acquisition, it attained the right to exercise free control over the company. As a result, by 1981, ESB was reporting operating losses; INCO eventually sold it in four separate parts.

Although the acquisition was not financially successful, it was precedent-setting; It set the stage for hostile takeover by respected companies in the second half of 1970 and through the fourth merger wave of the 1980s.