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The Motley Fool

Ask the Fool

Hostile Maneuvers

Q: Can you explain hostile takeovers? — K.W., Walnut Creek, California

A: Sure. A hostile takeover is, as you might have guessed, when one company buys another — against its will. That’s unlike the norm, when two companies agree to merge and share information and planning throughout the process.

Here’s how a takeover can unfold: One company sees value in another and targets it for acquisition. (Companies whose share prices have fallen are extra-vulnerable to takeovers.) It makes an offer to purchase or merge with the target. If the target’s management team supports the idea, they will recommend that shareholders approve it. The acquirer will typically pay shareholders in cash and/or shares of itself or the new company, sometimes even paying a premium above the target’s going price.

If the target’s management rejects the takeover proposal, the would-be acquirer may issue a “tender offer,” offering to buy shares from shareholders at a premium price until it has enough shares to wield control. It might also set up a “proxy fight,” urging shareholders to vote out certain members of the board of directors.

Xerox is currently attempting a hostile takeover of HP. Successful hostile takeovers in the past include Kraft Foods’ acquisition of Cadbury and InBev’s purchase of Anheuser-Busch.

Fool’s School

A Strong Dollar Isn’t Always Good

We’re living in a period where the U.S. dollar is relatively strong as measured against other currencies. That certainly sounds like it can only be good for America, but in fact, there are both pros and cons to a strong local currency.

Consider, for starters, that many U.S. businesses generate much of their income abroad. Coca-Cola, as an example, generated more than half of its operating revenue outside of North America, according to its last annual report, while McDonald’s reaped 64% of its revenue outside of the U.S. So these companies are not exchanging burgers and drinks only for U.S. dollars — they’re also taking in baht, euros, francs, kroner, pesos, pounds, ringgits, riyals, rand, rubles, rupees, shekels, won, yen and yuan.

The exchange rate between any two currencies fluctuates over time. When a multinational company wants to convert non-U.S. revenue into U.S. dollars, the value it gets depends on the current exchange rate. If the other currency is weaker than the dollar, the company will receive fewer dollars for it; when the foreign currency is strong, the value converts into more dollars. Thus, a strong dollar hurts the financial performance of U.S. companies with significant operations abroad.

Some companies even cite adverse currency translation effects when they report disappointing results. Other companies protect themselves to some degree from these effects, perhaps locking in exchange rates via contracts. A strong dollar can also hurt exports, as American goods will cost more for buyers with weaker currencies, and that can depress sales.

On the other hand, a strong dollar is great for Americans traveling abroad, as they’ll get more local currency for their money. Imported goods can get cheaper for Americans, too. A strong dollar will also help American companies that buy a lot of products or services (such as raw materials or outsourced labor) abroad, as they can get more bang for their buck.

Investors may want to keep currency effects in mind, as they can have a significant impact on some companies’ results. Including some international revenue in your portfolio can be a good defense against a weak dollar.

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