Takeovers

Takeovers are always a reality in the competing world of business. Merger and acquisition transactions depend a lot on the approval of a target company. It is not rare to find companies merging together with each other’s consent. However, a lot of hostile takeovers are definitely camouflaged to look like a friendly merger. This is the reason managers rely on defensive measures against such hostile takeovers.

Definition of Takeover

A merger or an acquisition transaction becomes a (hostile) takeover when the acquiring company purchases the target not through a mutual agreement with the management of the target company, but by directly approaching the shareholders of the company or attempting to replace the management to get the deal approved. The hostile takeover is achieved through a proxy fight or a tender offer.

The management of the target company has these two options when a hostile takeover is attempted by an acquirer:

  • Sell their company to a third party or the hostile bidder.
  • Decide to stay independent and resist the offer through various defensive measures.

Defensive Measures

Defensive measures can be put into action by the management of the target company either before or after the hostile offer. The defensive measures can be used for:

  • Delaying the transaction.
  • Negotiating a better deal.
  • Keeping the target company independent.

Defensive measures can be of two types:

  • Pre-offer Takeover Defence Mechanism
  • Post-offer Takeover Defence Mechanism

Generally, the experts recommend setting up pre-offer defensive measures as they are less scrutinised in the court in comparison to the post-offer defence measures.

Pre-offer Takeover Defence Mechanism

These are the following types of pre-offer defensive measures:

Poison Pill

The target company gives its shareholders the right to buy the stocks of the target company at a large discount to the stock’s market price.

Poison Put

The target company gives its bondholders the right to sell the bonds back to the company at a pre-determined redemption price, which is generally above or at the par value.

Restrictive Takeover Laws

The companies can incorporate themselves in the states where the law helps them to defend hostile takeovers.

Staggered Board

Under this strategy, the target company’s board of directors is divided into three groups of equal sizes. Each group can be elected in a staggered way for the three-year term. This arrangement will deter an acquirer as he can win only one-third of the directors in a year.

Restricted Voting Rights

Under this measure, shareholders who have acquired a large percentage of stocks recently are restricted to vote.

Supermajority Voting Provisions

Through this provision, a higher majority, say 85%, of the shareholders, need to approve the transaction, instead of standard 51%.

Fair Price Amendments

Through such amendments, the target company does not allow mergers where an offer is below a threshold value.

Golden Parachutes

Compensation arrangements are made between the target and the senior management. The managers have the right to leave the company with huge exit payouts if there is any change in the corporate control.

Post-Offer Takeover Defence Mechanism

These are the following types of post-offer defensive measures:

‘Just Say No’ Defence

The easiest way is to decline the offer. If the acquiring company tries the bear hug or even a tender offer, the management of the target company should explain to the shareholders and the board of directors why the deal is not the best for the company.

Litigation

The management can allege the violation of securities law and file a court case against the acquirer.

Greenmail

The target company makes an agreement with the acquirer to buy back its own shares from the acquirer at a premium. This is mostly accompanied by another clause prohibiting the acquirer to make another attempt for specific time period.

Share Repurchase

The target company can acquire its stocks from any shareholders by using a share repurchase. This can lead to an increase in the cost for the acquirer.

Leveraged Recapitalization

The target company uses a huge amount of debt to finance the share repurchases. However, not all shares are repurchased.

‘Crown Jewel’ Defence

The management of the target company can identify the major motivation behind the deal i.e a specific subsidiary or an asset and sell it off to another party.

‘Pac-man’ Defence

The target company can make a counter-offer to take over the acquiring company and defend itself. However, other defensive measures can’t be used later if the company decides to use this strategy.

White Knight Defence

The board of the target company looks for a third party that has a better fit with the company to buy the target company in place of the hostile acquirer. The third party is referred to as ‘White Knight’.

White Squire Defence

The board of the target company asks a third party to buy a substantial but a minority stake in the target company. This stake would be enough to obstruct the takeover with no need to sell the company.

Conclusion:
There are various defensive measures available to the managers to avoid getting acquired involuntarily. These can be used before or after the offer is made. It is important that managers know these measures in detail and makes provisions for the same. A target company needs to have its defences strong if they do not want to be acquired forcefully.

References:

Last updated on : July 31st, 2017
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    Motives of Mergers
  • Classification / Types of Mergers
    Classification / Types of Mergers
  • Conglomerate Merger
    Conglomerate Merger
  • Diversification
    Diversification
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