A hostile takeover typically involves a higher premium paid than a friendly takeover. Which of the following is correct?

A hostile takeover typically involves a higher premium paid than a friendly takeover. Which of the following is correct?

• A. True
• B. False
• C. Sometimes
• D. Only if the target is private

Answer: (A)

A premium is the extra price paid above the pre-announcement share price to persuade owners to sell. In a hostile takeover, the bidder goes directly to shareholders without the target’s board’s blessing and may face anti-takeover defenses and greater deal risk. To overcome these hurdles and entice shareholders who don’t have management backing, the bidder usually offers a larger premium. That higher premium reflects the increased risk and the need to make selling now more attractive than waiting for a negotiated deal. In contrast, friendly takeovers involve board approval and negotiated terms, often with clearer synergy value, so the premium can be lower. While there are exceptions, the typical pattern is that hostile bids pay a higher premium to compensate shareholders for the risk and lack of management support.

A premium is the extra price paid above the pre-announcement share price to persuade owners to sell. In a hostile takeover, the bidder goes directly to shareholders without the target’s board’s blessing and may face anti-takeover defenses and greater deal risk. To overcome these hurdles and entice shareholders who don’t have management backing, the bidder usually offers a larger premium. That higher premium reflects the increased risk and the need to make selling now more attractive than waiting for a negotiated deal. In contrast, friendly takeovers involve board approval and negotiated terms, often with clearer synergy value, so the premium can be lower. While there are exceptions, the typical pattern is that hostile bids pay a higher premium to compensate shareholders for the risk and lack of management support.