Hostile Takeover Defenses-II

-Goutham G Shetty-Raghavendra Bhat

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Topics• Definition• Some Concepts• Types

• Preventive Defense• Types of Preventive Takeover Defense

• Active Defense• Types of Active Defense

Hostile Take over

A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without informing the target company's board beforehand.

Terms used

• Killer bees are firms or individuals that are employed by a target company to fend off a takeover bid; these include investment bankers (primary), accountants, attorneys, tax specialists, etc. They aid by utilizing various anti-takeover strategies, thereby making the target company economically unattractive and acquisition more costly.

Types of Hostile Takeover

• Tender offer: acquiring company makes a public offer at a fixed price above the current market price

• Creeping Tender offer: purchasing enough stock on the open market, known as a creeping tender offer, to effect a change in management

• Proxy Fight: tries to persuade enough shareholders, usually a simple majority, to replace the management with a new one which will approve the takeover

• The famous proxy fight was Hewlett-Packard's takeover of Compaq. The deal was valued at $25 billion, but Hewlett-Packard reportedly spent huge sums on advertising to sway shareholders.

• HP wasn't fighting Compaq -- they were fighting a group of investors that included founding members of the company who opposed the merge. About 51 per cent of shareholders voted in favour of the merger. Despite attempts to halt the deal on legal grounds, it went as planned.

Proxy Fight

Categories of Takeover defense• Preventive measures• Active measures

Preventive measures are designed to reduce the likelihood of a financially successful hostile takeover

Active measures are employed after a hostile bid has been attempted

Precautionary Measures• Having a Early Warning Systems

Monitoring Shareholding

Trading Patterns • Poison Pills

• Flip-over • Flip-in • Back-End Plans • Voting Plans• Shadow pill• Chewable pill

• Corporate Charter Amendments• Staggered terms of the board of directors• Supermajority provisions• Fair price provisions• Dual capitalization

• Golden Parachutes

Having Early Warning System

• Analyze distribution of share ownership of the company

• Monitor the trading of its shares (trading patterns)

Corporate Standard Amendments

Staggered Board Amendments

• It is a type of defense where the terms of the board of directors so that only a few such as one-third of the directors may be elected during any one given year

• It requires share holder approval before they can be implemented

• Classified directors cannot be removed before their term expires

Supermajority Provisions

• These provisions usually require that at least 80% of voting shareholders approve of the takeover, as opposed to a simple 51% majority. Such a requirement can make it nearly impossible for an acquirer to obtain enough votes approving the takeover.

Fair Price Provisions

• It is a modification of corporations' charter that requires the acquirer to pay minority shareholders at least a fair market price for the company’s stock.

• -it is usually in terms of company’s P/E ratio

• -it’s a weak takeover defense

Dual Capitalization

Restructuring of equity into two classes of stock with different voting rightsE.g.. Ford MotorsBerkshire Hathaway

Concept of Golden Shares

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.

• First invented by famous Takeover Lawyer Martin Lipton in 1982 to defend El Paso Electric against General American Oil

• Actual Poison Pill was used in Brown Forman Vs. Lenox Takeover in 1983

• There are different types of poison pillsFlip-Over Shadow pill

Flip-In Chewable pill

Back-End Plans BankMail pill

Voting Plans

Flip-in

A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount. Management offers shares to investors at a discount if an acquirer merely purchases a certain percentage of the company. The discount is not available to the acquirer, and so it becomes extremely expensive for that acquirer to complete the takeover. Experts estimate that it would cost an unwanted bidder, on average, four to five times more to “swallow” a poison pill in order to acquire a target

Flip-over

A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger A ‘’flip-over’’ allows stockholders to buy the acquirer’s shares at a discounted price after the merger. The holders of common stock of a company receive one right for each share held, bearing a set expiration date and no voting power. In the event of an unwelcome bid, the rights begin trading separately from the shares.

Cont.…

If the bid is successful, all shareholders except the acquirer can exercise the right to purchase shares of the merged entity at discount. For instance, the shareholders have the right to purchase stock of the acquirer on a 2-for-1 basis in any subsequent merger. The significant dilution in the shareholdings of the acquirer makes the takeover expensive and sometimes frustrates it. If the takeover bid is abandoned, the company might redeem the rights.

Back-End Plans It is also known as note purchase rights plans. The first plan was developed in 1984 . Under back-end plan share the holder receive a right dividend which give share holder ability to exchange this right along with the share of stock for cash or senior securities that are equal in value to a specific “back-end” price stipulated by the issuer's board of directors.The back-end plans are used to try to limit the effectiveness of two tiered offer. In fact, the name back-end refers to the back end of a two-tiered offer.

Voting Plans

This poison pill strategy is designed to dilute the controlling power of the acquirer. Under this plan, the target company issues a dividend of securities, conferring special voting privileges to its stockholders. For example, the target company might issue shares that do not have special voting privileges at the outset. When a potential hostile bid occurs, the stockholders, other than the acquiring party, receive super voting privileges. Alternately, the target company's stockholders might receive securities with voting rights that increase in value over period.

Cont..

Voting plans were first developed in 1985. They are designed to prevent any out side entity from obtaining power of the company . Under this plan the company issues a dividend of preferred stock. If any outside entity acquires a substantial percentage of the company’s stock, holders of preferred stock become entitled to super voting rights.

Shadow pill

A bidder cannot simply look at a target company and conclude from the fact such a defense. Targets may simply adopt a pill after a bid has taken placeA company may also have a poison pill which is not openly advertised

Chewable pill

These are pills that disappear, or are brought to shareholders vote, if a company receives a certain type of offer such as a certain price or type of considerationE.g. If Company A wants to take over Company B it may have to pay minimum price set by the Board of Company B else poison pill will be triggered

Bank Mail Pills

Bank mail defense wherein the bank of a target firm refuses financing options to firms with takeover bids thereby having the triple impact of imposing financial restrictions upon the acquirer, increasing transaction costs in locating another financing option and also buying time for the target company to put more defenses in place.

Golden Parachutes

Golden Parachutes

• Special lucrative compensation agreements that the company provide to Top management

• it may be used both as a preventive measure and as an active measure

• It is triggered by some predetermined ownership of stock by an outside entity

• Silver Parachutes if it is given to most of the firms employees

• E.g. Yahoo

Dawn raid• A ‘dawn raid’, i.e., a sudden entry into the stock

market by the predator at a price above the previous market level, with a view to acquiring a major stake in a short space of time, in that it may lead to a further takeover offer a few days later

Active Antitakeover Defenses

• Greenmail• White Knight• White squire• Pac-man Defense• Crown Jewel Defense

• Litigation• People Mail• Jonestown Defense• Standstill agreements• Capital Structure Changes

Greenmail• It 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

E.g..• First reported instance of greenmail occurred in

July 1979 • Carl Icahn bought 9.9% of Saxon Industries stock

for 7.21$ per share• Saxon was forced to Repurchase its own share at

10.5 $ per share on February 13, 1980 • New Career avenue was born “Corporate Raider”

Green mail has mostly decreased due to Capital gain tax imposed on the gains derived from such stakes.

White Knight, Grey Knight ,Black Knight, Yellow Knight and MacBeth

White Knights• It is the company that is more favorable

compared to the Hostile company (Dark Knight)• Eg. for White Knight• In 1998 Allied Signal Corp. launched a Proxy

Fight 10 Billion $ Takeover bid for AMP. Inc. whose value was just under 6.5 Billion $.[

• AMP Inc. found a “White Knight” in Tyco in more Favorable terms of stock for stock swap of 11.3 Billion

• Grey Knight is an acquiring company that enters a bid for a hostile takeover in addition to the target firm and first bidder, perceived as more favorable than the black knight (unfriendly bidder), but less favorable than the white knight (friendly bidder).

• Yellow Knight: A company that was once making a takeover attempt but ends up discussing a merger with the target company.

• Lady Macbeth StrategyA corporate-takeover strategy with which a third party poses as a white knight to gain trust, but then turns around and joins with unfriendly bidders.

Tale of 3 Knights• High-profile international takeover drama

surrounding Yahoo! — software giant Microsoft at first tried to sell itself as a friendly bidder. However, Yahoo found the offer a gross undervaluation of their company, which sent the ball back into Microsoft’s court.

• Search engine behemoth Google and AOL appeared as white knights to help Yahoo brush off Microsoft, if it were to become a black knight as it has reportedly threatened to go ahead with a hostile takeover.

• Rupert Murdoch led News Corp was also keen in Yahoo! which makes it the Grey knight.

• The situation could get real interesting if black knight and grey knight get together!

White Squire Defense• A White Squire is a firm that consents to

purchase a large block of the target company’s stock

• The White Squire is typically not interested in acquiring management control of the target but either as an investment or representation in board of the target company

Advantage to Target CompanyLarge amount of Stock will be placed in hands of an investor which may not be tendered to hostile bidder

E.g.. Technically Reliance is White Squire to Oberoi Hotels against EIH

Pac-Man Defense“Best Defense is a Good Offence”

It occurs when the Target makes an offer to buy the Hostile company in response to Hostile bid for the TargetEg.Martin Marietta Corporation made an offer to buy Bendix following Bendix’s unwanted $43 tender offer for Martin Marietta in 1962

Crown Jewel Defense • It is a strategy in which the target

company sells off its most attractive assets to a friendly third party or spin off the valuable assets in a separate entity

• unfriendly bidder is less attracted to the company assets

Standstill Agreement

“ 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.”

Capital Structure Changes

A target corporation may initiate various changes in its capital structure in an attempt to ward off a hostile bidder. These defensive capital structure changes are used in four main ways:• Recapitalize.• Assume more debt: a. Bonds b. Bank loan

• Issue more shares: a. General Issue b. White Squire c. Employee stock action plan• Buy back Shares: a. Self tender b. Open market tender c. Targeted shares repurchase

People Mail

• It is kind of Black Mail where the top Management threatens to resign En-mass in case the Hostile takeover takes over the company

Jonestown Defense

• Jonestown defense is an extreme corporation defense against hostile takeovers. In this strategy, the target firm engages in tactics that might threaten the firm’s existence to thwart an imposing acquirer’s bids. This is also known as a “suicide pill”, and is an extreme version of the poison pill.

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