Over the past five years, the increasingly hostile M&A environment has affected a rising number of company boards and management. Hostile M&A activity, which totaled about $26 billion of transaction value in 2003, is tracking to reach $297 billion by the end of 2008.

Historically, would-be acquirers seeking to bypass a target's board were primarily limited to raiders and their controlled entities, such as Carl Icahn and T. Boone Pickens, but the continued propagation of hedge fund and private equity players has been a driving factor in the increase in hostile activity. Event-driven, or "activist," funds rose from 14.2% of funds in 2001 to 20.8% of funds in 2007 -- with only about a 25% chance that a company targeted by an activist fund will avoid a change-of-control transaction, CEO replacement or other major transaction.

With new players entering the hostile M&A arena and the Securities and Exchange Commission reforming tender offer rules in late 2006, pursuing a hostile transaction has gone mainstream, with strategic players also getting involved. The most notable this year included Microsoft Corp.'s $44.6 billion attempt to acquire Yahoo! Inc. and InBev SA's soon-to-be-completed $52 billion purchase of Anheuser-Busch Cos.

Moreover, hostile acquirers are no longer viewed with the same disdain as were corporate raiders in the 1980s and 1990s. Although Carl Icahn's tactics and processes haven't changed much in the past 25 years, The New York Times proclaimed that "at the age of 70, Mr. Icahn has gone from being a corporate raider to a "shareholder activist."

With the credit and financial market crisis in full swing, stock prices are under significant pressure. Boards in several sectors, however, continue to believe in the fundamental performance of their business and their long-term business strategy.

Potential acquirers who share their view will jump at the buying opportunity. These acquirers will seek to deploy their cash when the market attains some form of greater stability, likely finding those companies with the most depressed valuations to be the most attractive targets. A sale at such depressed prices will not likely be viewed by the target's board as in the best interests of stockholders.

Hostile bids often result in significant disruption to the target's business operations and divert management's and the board's time and attention from executing the company's existing business strategy. Courts enhance their
scrutiny if a board implements defensive actions in response to a hostile transaction. If the board ultimately agrees
to support the transaction, their fiduciary duties require that they achieve the highest value reasonably attainable for the stockholders.

In July, the Delaware Court of Chancery found in Ryan v. Lyondell that a board potentially breached its fiduciary duties by failing to consider fully a proposed acquisition, meaning boards will need to implement even more process when considering acquisitions. Boards must also demonstrate that they negotiated an increased deal price in exchange for less certainty or otherwise had to agree to the offered price to prevent the deal from failing.

Due to these factors, company boards should take time now to engage in contingency planning by assessing the company's strategic alternatives, even if they do not expect to sell the company. This analysis should include meeting with the company's financial and legal advisers at least annually to discuss and assess the current market value of the company, the potential long-term market value that may be achieved if the company continues to execute its strategic plan and the potential effectiveness of the company's antitakeover defense mechanisms such as poison pills, staggered boards and prohibitions on stockholder action by written consent.

Taking these steps will enable the board to become fully informed about the company's possible responses in advance of an unsolicited and unexpected offer and to respond quickly to any offer, in order to minimize disruption to the company's business. These actions will also help insulate the board members' potential exposure to personal liability should a transaction ultimately take place or if the board adopts defensive measures in response to an offer.

Jonn R. Beeson is a partner in the mergers and acquisitions practice at Jones Day, based in the firm's Irvine, Calif., office.