Investment Banking Preparing for an unsolicited bid

Offers to purchase your company can come in different forms, so it’s important to distinguish between an unsolicited bid, which could be one company approaching you with an offer to purchase your firm, and a hostile takeover. The first is often simply someone looking to buy your business or increase their stake and say in how the business is run. It’s an opportunity you can either take or turn away. The latter scenario can happen to publicly owned companies when a prominent shareholder or group of shareholders, sometimes a private equity firm, attempts to purchase enough shares to have the voting rights to influence decision-making.

Often, there is an increase in unsolicited offers of both varieties after volatile equity markets. That’s because lower share prices or lower business valuations make it easier for companies to buy up shares at discounted rates or make offers to private companies that may be distressed.^{Disclosure 1} Hubbard notes that increased levels of shareholder activism are also a reason that unsolicited bids and even hostile takeovers have become more newsworthy.

“For some types of investors, their business model is essentially to take a larger stake in a public company so they can drive action, whether it be changing the board or forcing a sale or divesting noncore assets,” says Hubbard.

If you’re a leader at a privately held company, the decision-making process may be straightforward: You and any others with an ownership stake, with the help of an advisor like Truist Securities that can understand your company’s value, determine whether the bid is in the best interest of you, your company, and your employees. But for public companies, it’s a bit more complicated.

If you’re a leader of a public company, Hubbard says it’s important to always be prepared for the possibility of an unsolicited offer. This includes keeping your board of directors aware of factors like financial projections, your place within your industry, and any future growth opportunities, including acquisitions or sales.

“You have to continually assess all your strategic alternatives so that the board is ready to respond and weigh whether the value that’s being put on the table or the potential action that’s being suggested by activist shareholders is the right alternative,” he says. It’s important to remember that the board of directors is duty-bound to make the decision in the best interest of the shareholders, not necessarily you as a leader.

“If the board isn’t prepared, they have to quickly assess and assemble a team and then begin doing what should have been done on a quarterly or semiannual basis in order to respond in a more immediate and reasonable manner,” says Hubbard. “When you’re trying to react at the last minute, you tend to make mistakes or overlook things or act too quickly.”

There are other mechanisms that may help if you’re trying to ward off unsolicited bids, but they have potential consequences that should always be considered. One is often referred to as the “poison pill,” which can be implemented in multiple ways, but is aimed at making the company’s purchase less attractive to a potential buyer or takeover attempt. One tactic could be to have the management team threaten to resign in the event of an ownership change. This means new owners would have to replace company leadership and potentially lose institutional knowledge, but if the new ownership wants to overhaul operations, they may not look at that as a negative.

In another version of the poison pill, company leaders and employees, or shareholders friendly to leadership, may purchase more company shares at discounted prices through various means, making it more difficult for an outside entity to buy enough shares to take over the voting majority. Implementing an employee stock ownership plan (ESOP) may be one way to give employees a bigger say in company direction and make it more challenging for outside groups to buy up shares.

Your Truist Securities team can help you prepare for any unsolicited bids. Creating a future-looking plan that’s regularly updated and presented to the board can help make the board feel more confident about the direction of the company. Your Truist team can also use its deep knowledge of industry sectors to put together an analysis of where your firm fits in the industry landscape, helping you and your board better understand your current value and potential future value based on strategic direction and industry dynamics.

It’s important to keep in mind that unsolicited bids don’t have to be negative events. Receiving an offer for your company could drive competitors to make additional offers, creating a bidding war that could drive up a potential sale value. For privately held firms, this could create a path to transition for the owner or ownership team.

“You want your board or management team to be aware of what’s going on so they can say they’re following the best strategic path at the time,” says Hubbard. “This helps them discharge their duty to shareholders.”