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 wa
s 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 poiso
n 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
Greenmail

 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

 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.