Business Ownership – merger and acquisition defenses
During a hostile takeover, one company tries to acquire another company without the approval of the target corporation’s Board of Directors. Usually when a company doesn’t want to be taken over, it’s because they feel that the offer is inadequate and they think that shareholders would be better served if the company wasn’t bought out. There are several ways to defend against a hostile takeover. The most effective methods are built-in defensive measures that make a company difficult to take over. These methods are collectively referred to as “shark repellent.” Here are a few examples of shark repellants (HSW, 2007):
- The Golden Parachute is a provision in a CEO’s contract. It states that he will get a large bonus in cash or stock if the company is acquired. This makes the acquisition more expensive, and less attractive. Unfortunately, it also means that a CEO can purposefully do a terrible job of running a company, make it very attractive for someone who wants to acquire it, and receive a huge financial reward (TakeoverDefense.com, 2007).
- The supermajority is a defense that requires 70 or 80 percent of shareholders to approve of any acquisition. This makes it much more difficult for someone to conduct a takeover by buying enough stock for a controlling interest (HSW, 2007).
- A staggered board of directors drags out the takeover process by preventing the entire board from being replaced at the same time. Many companies that are interested in making an acquisition don’t want to wait four years for the board to turn over (HSW, 2007).
- Dual-class stock allows company owners to hold onto voting stock, while the company issues stock with little or no voting rights to the public. In this manner, investors can purchase stocks, but they can’t purchase control of the company (HSW, 2007).
In addition to takeover prevention, there are steps companies can take to thwart a takeover once it has begun. One of the more common defenses is the poison pill. A poison pill can take many forms, but it basically refers to any strategy the target company undertakes to make itself less valuable or less desirable as an acquisition (Pender, 2004):
- The people pill – Sometimes, high-level managers and other employees threaten that they will all leave the company if it is acquired. This reduces the value of the company and works if the employees themselves are highly valuable and vital to the company’s success (HSW, 2007).
- The crown jewels defense – Sometimes a specific aspect of a company is particularly valuable. For example, a telecommunications company might have a highly-regarded research and development (R&D) division. This division is the company’s “crown jewels.” It might respond to a hostile bid by selling off the R&D division to another company, or spinning it off into a separate corporation (Takeoverdefense.com, 2007).
- Flip-in – This common poison pill is a provision that allows current shareholders to buy more stocks at a steep discount in the event of a takeover attempt. The provision is often triggered whenever any one shareholder reaches a certain percentage of total shares (usually 20 to 40 percent). The flow of additional cheap shares into the total pool of shares for the company makes all previously existing shares worth less. The shareholders are also less powerful in terms of voting, because now each share is a smaller percentage of the total (HSW, 2007).
- Some of the more drastic poison pill methods involve deliberately taking on large amounts of debt that the acquiring company would have to pay off. This makes the target far less attractive as an acquisition, although it can lead to serious financial problems or even bankruptcy and dissolution.
- In rare cases, a company decides that it would rather go out of business than be acquired, so they intentionally rack up enough debt to force bankruptcy. This is known as the Jonestown Defense.
For a company’s board of directors and executives, poison pills are uniformly good. They grant company management the leverage to define the terms of any takeover in a manner that conforms to their wishes. Whether these terms primarily benefit shareholders, employees, or the corporate managers themselves depends on the integrity of the managers in fulfilling their various responsibilities to shareholders, employees, and customers. Shareholders can find both pros and cons in poison pills.
Even though a shareholder may get a quick profit, it may well be that the long-term profits of continuing to own the acquired company would have been much higher. Poison pills are usually only used to serve the shareholders’ best interest by protecting them from being bought out at a low price (Caplinger, 2006).
The White Knight is a common tactic in which the target finds another company to come in and purchase them out from under the hostile company. There are several reasons why they would prefer one company to another — better purchase terms, a better relationship or better prospects for long-term success. In general, it is considered one of the anti-takeover defense tactics used to counter tender offers.
Investment bankers can achieve a White Knight raider to also play against the unsolicited takeover. The White Knight presence can first push the hostile takeover bid till the edge, and break-even point. Second, if result in attack quit, a new mega corporation can surge, stronger than ever (Takeoverdefense.com, 2007).
For the target company it is a good strategy, once it makes takeover defense mostly to be decided in the stock exchange, between bankers, traders, analysts. However, the merger may not be the best end and beginning of it all. A White Knight can carry out the corporation into more problems instead of making it stronger.
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Caplinger (2006). Don’t swallow the poison pill. The Motley Fool. December 7, 2006. http://www.fool.com/investing/value/2006/12/07/dont-swallow-the-poison-pill.aspx
HSW (2007). Shark Repellent. http://money.howstuffworks.com/hostile-takeover3.htm
TakeoverDefense.com (2007). White Knight. http://www.takeoverdefense.com/take7.php
Pender, Kathleen (2004). Poison Pill’s a tough tactic to swallow. San Francisco Chronicle. November 23, 2004. http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2004/11/23/BUGHR9VSAD1.DTL&type=business