Takeover Defences

Takeover process can be described in terms of one animal hunting another. A company or individual seeking to take over another company is a predator, and the target company is a prey. Both predators and preys have opposite intentions and use different strategies: predators try to acquire a target company (their strategies were described in Reading II) and preys try to defend against predators. A target company has numerous methods to avoid a takeover. No one knows exactly what is the best and the most efficient defence against a hostile takeover. Obviously, it varies from situation to situation. But some types of defences that managers can use seem to be more efficient than others.

Some examples of defensive tactics are: poison pills, shark repellants, golden parachutes, white knights, greenmail, etc. The objectives of these defensive measures are to slow down the process of a takeover attempt and make it more costly for the predator.

A poison pill is a tactics used by a company to make itself unattractive to a bidder, in which the value of the company is automatically reduced. This tactics refers to what some companies do to reduce their value in order to prevent themselves from being taken over by another company. In practice, it represents a very specific type of anti-takeover defence such as spending all the company’s cash reserves or selling an issue of shares and changing the share voting structure, which make the takeover unfavourable to the bidders.

Shark repellents are specific types of takeover defences that represent amending a corporate charter (a formal document describing the rights, aims, or principles of an organization or group of people) to deter takeover bids. Shark repellents are put in place largely to reinforce the ability of a firm’s board of directors to retain control.

A golden parachute is an agreement to pay a large amount of money or other financial compensation to senior executives of a company if they are dismissed from a corporation as a result of a merger or takeover.

A target company which seeks to avoid being taken over by a specific bidder may try to be acquired by another firm, a white knight, which is viewed as a more appropriate suitor. To complete such a transaction, the white knight must be willing to acquire the target on more favourable terms than those of other bidders. More favourable terms need not involve an offer of the price higher than the current bidder’s proposal. The presumed white knight may be viewed as more favourable in terms of its willingness to allow the target firm’s management to stay in place and continue to pursue their current strategy.

Greenmail is a tactic which refers to paying a potential acquirer to leave a prey alone. It consists in buying back by a target company a sufficient number of shares at a higher price in order to retain control in exchange for the acquirer’s agreement not to undertake a hostile takeover. In exchange for the payment, the potential predator is required to sign an agreement, which typically specifies the amount of shares stock that the predator can own and the circumstances under which the raider can sell the shares stock currently owned.

Text 9.4 Read the text and fill in the gaps.