Antitakeover Measures

Parvesh Aghi

Hostile takeover A hostile takeover occurs when one

company takes over another without the support or wishes of the company being controlled.

The takeover happens when a board of directors or management of a targeted company has not agreed for control to be transferred to another party, but it happens anyway against their wishes.

Companies prone to takeover

Characteristics of companies prone to become the target of a hostile takeover

Company's stock is undervalued Undervalued companies that are

cash flow rich low debt ratio

The array of antitakeover defenses can be divided into two categories :

Preventative measures- are designed to reduce the likely hood of a financially successful hostile takeover.

Active measures –are employed after a hostile bid has been attempted

Opponent of these measures believe that they entrench management and reduce the value of stockholder’s investment.

They see activities of raiders as an element that seeks to keep management ‘honest”

They contend that managers who feel threatened by raiders will manage the firm more effectively , which will in turn result in higher stock value.

Preventative antitakeover measures

Some of the plans are are directed at reducing the value that the bidder can find in the firm.

The presence of certain factors such as steady cash flows , low debt levels, and low stock price relative to the value of firm’s assets may make a firm vulnerable to takeover.

Therefore , some preventative measures are designed to alter these characteristics of the firm in advance, or upon completion of a hostile takeover , so that the financial incentive a raider might have to acquire the target is significantly reduced

Types of preventative measures

Poison pills Corporate charter amendments

Golden parachutes

Poison pills A strategy used by corporations to

discourage hostile takeovers. With a poison pill, the target

company attempts to make its stock less attractive to the acquirer.

A legal contract giving target company shareholders certain rights under specific circumstances

Poison pills “poison pill” is a tactic public

companies use to thwart hostile takeovers.

In effect, it is an agreement adopted by a company’s board of directors that makes the target’s stock prohibitively expensive or otherwise unattractive to an unwanted acquirer.

Poison pills To date, no takeover bid has ever

seen a poison pill fully executed — management teams typically have used the strategy as a deterrent and negotiation tool, buying their company time to bargain for a better purchase price.

There are two types of poison pills:

1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount.

2. A "flip-over" Gives target shareholders the right to buy shares in the acquiring company at a discount (usually 1/2 price) AFTER a merger

Poison pills Poison pills are generally on the

decline in large-cap companies, with the notable exception of Yahoo, which has one in place that will be triggered if Microsoft or any other potential suitor buys more than 15 percent of the company without board approval.

Strong Points As a defensive tactic, poison pills

are extremely effective. Not only do they fend off unwanted

takeover bids, but boards often argue that the strategy gives the company an opportunity to find a more suitable acquiring party, a so-called “white knight.”

Boards also favor poison pills for the leverage they bring to the bargaining table.

In 2003, enterprise software giant Oracle attempted to acquire rival PeopleSoft through a $5.1 billion hostile takeover bid.

But PeopleSoft’s poison pill was set to trigger if Oracle bought more than 20 percent of the company.

After a year-long battle, PeopleSoft finally voided its poison pill and was acquired by Oracle for $10.3 billion — nearly double Oracle’s initial offer.

Weak Spots

Since shareholders could gain from a takeover, they often view management’s adoption of a poison pill as blatant disregard of investors’ interests.

Accordingly, in some cases investors send a clear message that they don’t agree with management’s strategy by dumping some of their shares.

Consider the example of oil company Tesoro: When the company adopted a poison pill in November 2007 to defend itself against billionaire Kirk Kerkorian’s Tracinda Corp., its stock plummeted almost 14 percent between the week before the announcement and the week after.

In March 2008, Tesoro’s management dropped its poison pill, with CEO Bruce Smith explaining that the company wanted to act in “the best interests of our stockholders.”

Golden parachutes

Lucrative benefits given to top executives in the event that a company is taken over by another firm, resulting in the loss of their job.

Benefits include items such as stock options, bonuses, severance pay, etc

A golden parachute is an agreement between a company and an employee specifying that the employee will receive certain significant benefits if employment is terminated.

Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is unspecified.

These benefits may include severance pay, cash bonuses, stock options, or other benefits.

Corporate charter amendments The target company may enact various

amendments in its corporate charter that will make it more difficult for a hostile acquirer to bring about a change in managerial control of the target.

Some of the amendments are supermajority provisions , staggered boards and fair price provisions.

The extent to which they may be implemented depend on the statutory provisions prevailing in the country.

supermajority provision

A part of a corporation's bylaws that requires an unusually high percentage of stockholder votes in order to bring about certain changes.

For example, a firm may require that 80% of shares approve a resolution to call a meeting of stockholders for any purpose other than the annual meeting.

This provision makes a corporate takeover more difficult.

Form of acquisition defense that raises the minimum number of votes required for approval of a merger (e.g., to two-thirds or three-quarters of outstanding shares), implying that a hostile acquirer needs more than 50 percent of the votes to effect a change in control.

Staggered Board of Directors

Occurs when a portion of directors are elected periodically, instead of all at once.

Board terms are often staggered in order to thwart unfriendly takeover attempts, since potential acquirers would have to wait longer before they could take control of a company's board through the normal voting procedure.

When a hostile bidder tries to acquire a company with a staggered board, it is forced to wait at least one year for the next annual meeting of shareholders before it can gain control. 

Furthermore, hostile bidders are forced to win two seats on the board; the elections for these seats occur at different points in time (at least one year apart), creating yet another obstacle for the hostile bidder.

Fair price provisions A fair price amendment requires that

an acquirer pay a fair price for all of the corporation’s outstanding stock.

A fair price may be determined as an historical multiple of the company’s earnings or even a predetermined multiple of earnings or book value of the target company.

Active antitakeover defenses Greenmail Stand still agreements White knight White squire Capital structure changes Litigation Pac-Man defense

Share repurchase of the bidder’s stock at premium

A company may also pursue the greenmail option by buying back its recently acquired stock from the raider at a higher price in order to avoid a takeover

Greenmail

Greenmail

The term greenmail refers to the payment of a substantial premium for a significant shareholder’s stock in return for the stockholder’s agreement that he or she will not initiate a bid for control of the company

Purchase of stock from specified group of stockholders who may not ever contemplate a raid on the company

Forcing a firm to buy its own shares at an inflated price, to ward off a corporate raider who holds enough stock to pose a hostile takeover threat.

It is a type of blackmail that nets a raider a handsome profit just for creating a takeover threat.

Stand still agreements A standstill agreement occurs when the

target corporation reaches a contractual agreement with a potential acquirer whereby the would be acquirer agrees not to increase its holdings in the target during a particular time period.

Such an agreement takes place when the acquiring firm has established sufficient-

- Stockholding s to be able to pose a threat to mount a takeover battle for the target.

Stand still agreements A contract that stalls or stops the process of a

hostile takeover. The target firm either offers to repurchase the

shares held by the hostile bidder, usually at a large premium, or asks the bidder to limit its holdings.

This act will stop the current attack and give the company time to take preventative measures against future takeovers.

White knight

When a corporation is the target of an unwanted bid or threat of bid from a potential acquirer , it may seek the aid of a white knight

A potential acquirer who is sought out by a target company's management to take over the company to avoid a hostile takeover by an undesirable black knight

Examples of white knights - JPMorgan Chase acquired Bear

Stearns allowing Bear Stearns to avoid insolvency after Bear Stearns stock price suffered a precipitous decline, with its market capitalization dropping by 92%.

Fiat takes over Chrysler, saving the struggling automaker from liquidation.

Examples of white knights Sid Bass and his sons buying

significant interest in Walt Disney Productions as a defense against Saul Steinberg‘s hostile bid for the company

White squire strategy An antitakeover strategy in which

a takeover target places a block of its stock in the hands of an investor deemed sympathetic to management.

Having a white squire decreases the possibility of a takeover because the suitor must acquire a significantly greater proportion of the remaining shares in order to complete the takeover.

A white squire is similar to a white knight, except that it only exercises a significant minority stake, as opposed to a majority stake.

A white squire doesn't have the intention, but rather serves as a figurehead in defense of a hostile takeover.

The white squire may often also get special voting rights for their equity stake.

However, the white squire may become disenchanted and put its block of stock up for sale, or it may itself mount a takeover attempt

Capital structure changes A target company may initiate

various changes in its capital structure in an attempt to ward off a hostile bidder .

Theses defensive capital structure changes are used in four main ways

Capital structure changes

Recapitalize Assume more debt Issue more shares Buy back shares

Recapitalize A recapitalization plan often

involves paying a super dividend to the stockholders , which is financed through assumption of considerable debt.

For this reason, these plans are sometimes known as leveraged recapitalizations

Recapitalize When a company is recapitalized ,

it substitutes most of its equity for debt while paying stockholders a large dividend.

After recapitalization , the company is in dramatically different financial condition than it was before it.

Large increase in the company’s debt makes the firm less attractive to subsequent bidders

Assume more debt A Low level of debt relative to

equity can make a company vulnerable to a takeover.

A hostile bidder can utilize the target’s borrowing capacity to help finance the acquisition of the target

However , additional debt can make the target riskier because of the higher debt service relative to the target’s cash flow.

Thus preventing the acquisition by assuming additional debt may result in target’s future bankruptcy

Issue more shares Issuing more shares would change

the company ‘s capital structure because it increases equity while maintaining the current level of debt

By issuing more shares , the target company makes it more difficult and costly to acquire a majority of the stock in the target

Buy back shares Such share purchase can have

several advantages for a target corporation :

Share repurchases can divert shares away from hostile bidder

Share repurchases can also divert shares away from the hands of arbitragers.

Arbitragers can be of great assistance to a hostile bidder because they acquire shares with the explicit purpose of earning high returns by selling them to the highest bidder.

Pac – Man Defense A defensive tactic used by a targeted

firm in a hostile takeover situation.

In a Pac-Man defense, the target firm turns around and tries to acquire the other company that has made the hostile takeover attempt.