What Is an Unsolicited Bid?

An unsolicited bid is an offer made by an individual, investor, or company to purchase a company that is not actively seeking a buyer. Unsolicited bids may sometimes be referred to as hostile bids if the target company doesn't want to be acquired. They usually come up when a potential acquirer sees value in the target company.

How Unsolicited Bids Work

An unsolicited bid comes about when a potential acquirer takes an interest in a target company and makes a bid to purchase it. In this case, the bid is the result of the acquirer's initiative rather than at the request of the bid-upon company.

An unsolicited bid to purchase a company not intending to be sold may be followed by other unsolicited bids as the news travels. These other bids may up the purchase price and start a bidding war or takeover fight.

While unsolicited bids may involve private companies, many bids are made by publicly-traded companies. These kinds of bids were popular in the 1980s when many bidders recognized the potential for profit in undervalued companies or those that were mismanaged.

Unsolicited Bid vs. Solicited Bid

An unsolicited bid may come as a surprise to the target, while a solicited bid is the opposite. With a solicited bid, the target is actively seeking a purchaser and wants to be purchased. These kinds of bids are often called friendly takeovers, or proposals that are approved by the management of both companies.

Why Do Companies Make Unsolicited Bids?

Unsolicited bidding typically occurs when a company wants to purchase another company in order to:

• Control its market share.
• Profit from its expected growth.
• Have access to proprietary technology.
• Limit competitors from taking advantage of these situations.
• Buy the target company and break it up.

How To Avoid or Fight off an Unsolicited Bid

A vulnerable company may have several mechanisms with which to defend itself if it becomes the target of an unsolicited offer or, ultimately, a hostile takeover. First, it can reject the offer outright. If that doesn't work, there is the people poison pill defense, where the management of the target company threatens to resign in the event of a takeover. This would force the acquirer to assemble a new management team if the acquisition was successful, which may be costly.

Another defense mechanism is the poison pill, where shareholders buy more company stock at a discount, thereby raising the number of shares the bidder will have to purchase to realize the unsolicited bid. Another way to avoid being a target is to set up an employee stock ownership plan, which would allow employees to buy shares in the company, thereby giving them the ability to vote alongside management about important decisions involving the company.

Example of an Unsolicited Bid

Company ABC, an African oil company, makes an unsolicited offer to purchase another African oil company, Company DEF. Company ABC believes that by purchasing DEF, it will remove a competitor, grow its business by expanding its market share, and absorb the cutting-edge technology that DEF has created.

ABC offers $1 billion in a proposed all-cash deal; however, DEF believes the price is too low and turns the deal down. ABC comes back with another unsolicited bid in the amount of $1.4 billion. DEF ponders this deal until Company XYZ, a Saudi oil company, makes an unsolicited bid of $2 billion.

This price is considered high by market analysts and is too expensive for Company ABC to compete with. XYZ has significant reserves of cash on hand and covets DEF's technology. The offer is accepted by DEF and the merger goes through with XYZ.