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What would it mean if Dollar General went ‘hostile’?

Scott Tong Sep 2, 2014
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What would it mean if Dollar General went ‘hostile’?

Scott Tong Sep 2, 2014
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There’s a bidding war in the dollar store space. The target is Family Dollar, the stores with the mostly red logos. The courters: Dollar General, with the bright yellow letters, and its green-logo competitor Dollar Tree.

Dollar General, already rejected by Family Dollar, has increased its takeover price to $9.1 billion. If this fails, word on the street is it could pursue a rare hostile takeover.

At this point, Family Dollar has turned down the highest-priced offer.

“Just like in a family, if two families are trying to negotiate over marriage, and somebody comes with a slightly higher dowry, but you think the marriage might be better — or she’s actually in love with somebody different — you might not take the highest offer,” says Michael Goldstein, finance professor at Babson College.

At issue is the rejecting company’s board of directors. When the board says no, an acquiring firm can go around it. That’s what’s known as going hostile.

“What you’re doing at that point is you’re making an offer directly to the shareholders,” says former investment banker Donna Hitscherich, now at Columbia Business School.

By now, the acquirer is hostile to the board, yet making nice with the shareholders.

“The shareholders are the owners of the company,” Hitscherich says. “It’s their capital that’s been committed. So if they determine to sell, they can do that.”

The acquirer offers shareholders a certain number of dollars per share. If enough shareholders agree to sell, the takeover goes through.

There are risks. In a hostile case, a would-be takeover company is flying half-blind.

Securities lawyer Bill Caffee says, in a friendly deal, the two firms exchange lots of information and research.

“And if you’re going hostile, obviously you’re not,” Caffee says. “You’re just kind of shootin’ into the wind. And looking at their public filings and saying, ‘We think it’s worth X dollars and here we go for it.’”  

Also, if word of a hostile takeover leaks out, hungry investors can push up the target’s stock price.

Since that’s how deals are valued, that ups the acquisition price.

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