Bowling Out Hostile Takeover

Mergers and acquisitions is a way for companies to grow, establish and gain entry into new markets. They can be categorized as either friendly or hostile. A hostile takeover occurs when a company gains control over a targeted company without the consent from either the board of directors or the management of the target company. Instead the aim of the acquirer is to persuade and charm the shareholders of the targeted company to sell their stock. In order to prevent a hostile takeover, many companies protect themselves by implementing various strategies and mechanisms. Some of the commonly used hostile takeover strategies are as follows:

Poison Pill: Poison pill is one of the most used and controversial defense strategy used. It is also commonly referred as shareholders rights. The logic behind the pill is to dilute the targeting company’s stocks in the company so much that bidder never manages to achieve an important part of the company without the consensus of the board and thus loses both time and money on their investment. Its features can be categorized as acquisition cost enhances and force the bidding company to pay more for the stocks and in return makes the targeted company less attractive.

Golden parachute as a defence strategy is a special and lucrative package, which aims to stagger and make hostile takeovers more expensive by distributing what is usually a lump sum payment to the board of directors of the target company. A golden parachute measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. Benefits written into the executive’s contract include items such as stock options, bonuses, liberal severance pay and so on. Golden parachutes can be worth millions of dollars and can cost the acquiring firm a lot of money and therefore act as a strong deterrent to proceeding with their takeover bid.

White knight: In this case, the targeted firm seeks for a friendly firm which can acquire a majority stake in the company and is therefore called a white knight. A white knight can be chosen for several reasons such as; friendly intentions, belief of better fit, belief of better synergies, belief of not dismissing employees or historical good relationships. The intention of the white knight strategy is to make sure that the company remains independent but could also be used to play the other two parties against each other to further sweeten the bid.

Pac-man defence: The Pac-man defence tactic is seen as an aggressive defensive tactic and the name comes from the famous videogame with the same name. Using this strategy, the target company fights fire with fire and starts buying shares in the company that has placed the hostile takeover bid. The strategy is in most cases a hard and complicated way to go and is best suited for targets which are larger than the hostile bidder. One incentive to use this strategy is that the target company finds the idea of a combined organization attractive but wants to control the final outcome, and therefore tries to buy the hostile bidder.

Shark repellent:  In this case, the target company makes special amendments to its bylaws that become active only when a takeover attempt is announced. The objective of the special amendment is to make the takeover less attractive to the acquirer. In such a case, the acquirer is termed as the shark and the proposed amendments are repellents that prevent the shark from attacking.

Macroni defence: It is a strategy wherein the target company issues a large number of bonds in the market carrying a peculiar condition, that is, if the company is taken over, the bonds will have to be redeemed at a very high price. High redemption price of the bonds acts as a deterrence and the acquirer may be forced to give up the takeover bid.

Crown Jewels: These are precious assets of the target often termed as Crown Jewels, which attract the raider to bid for the company’s control. On facing a hostile bid the company sells these assets at its own initiative leaving the rest of the company intact and hence removes the incentive for which bid was offered. Instead of selling the assets, the company may also lease them or mortgage them so that the attraction of free assets to the predator is suppressed. By selling these jewels the company removes the inducement that may have caused the bid.

There are several different defence measures one could use to fend off a hostile takeover against a firm that is targeting your company Selection of defence system against a hostile takeover is strategic decision. Careful and advance preparation is necessary to cut off such unfriendly bids. It is also important to remain flexible in responding to changing dynamics of takeover techniques.