Hostile Takeovers: Defenses and Strategies, Lecture notes of Management Theory

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UNIT 4: TAKEOVER

DEFENSES

HOSTILE TAKEOVER

• A hostile takeover occurs when one corporation, the acquiring corporation, attempts to take over another corporation, the target corporation, without the agreement of the target corporation’s board of directors.
• In a hostile takeover, the target company's directors do not side with the acquiring company's directors. In such a case, the acquiring company can offer to pay target company shareholders for their shares in what is known as a tender offer. If enough shares are purchased, the acquiring company can then approve a merger or simply appoint its own directors and officers who run the target company as a subsidiary.

BEAR HUG

• (^) A bear hug is an acquisition strategy where the acquirer makes an offer to buy the shares of the target company at a price that is clearly higher than what the target is currently worth. This offer is intended to eliminate the possibility of competing bids, while making it difficult for a target company to reject the offer.
• (^) The board of directors of the target company has a fiduciary responsibility to obtain the best possible return for the shareholders of the target business, so the board may essentially be forced to acquiesce and accept the offer. Otherwise, the board may face lawsuits from shareholders. Another advantage of the bear hug is that other potential bidders will very likely stay away, since the price offered is so high that it would be uneconomical for them to top the offer.
• (^) If the board does not accept the bear hug offer, there is an implied threat that the acquirer will then take the issue directly to the shareholders with a tender offer to purchase their shares. Thus, the bear hug is essentially a two-step strategy: an initial overwhelming offer to the board, followed by the same offer to the shareholders.
• While there is a good chance that a bear hug strategy will work, the downside is that it can be extremely expensive, so the acquirer has little chance of earning an adequate return on its investment in the target. This approach is only needed for a hostile takeover, since a friendly one can usually be achieved with a smaller investment.

PROXY FIGHT

• A proxy fight, also known as a proxy contest or proxy battle, refers to a situation in which a group of shareholders in a company joins forces in an attempt to oppose and vote out the current management or board of directors. In other words, a proxy fight is a battle between shareholders and senior management for control over the company. It is also a strategy commonly employed in hostile takeovers.
• (^) Proxy fights are commonly initiated by dissatisfied shareholders of a company. In a proxy battle, shareholders convene with other shareholders to use their votes to pressure management and the board of directors to make changes within the company. The shareholders typically pressure the board of directors by voting against them at the annual general meeting (AGM).

TENDER OFFER

• A tender offer is an offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price. To tender is to invite bids for a project or accept a formal offer such as a takeover bid.

TWO-TIERED TENDER OFFER

• (^) Under a two-tiered tender offer, an acquirer offers a better deal for a limited number of shares of the target company that it wishes to purchase, such as a higher proportion of cash or a higher price per share. This initial tier is designed to give the acquirer control over the target company. The acquirer then makes a reduced offer for an additional group of shares through a second tier that has a later completion date. The intent of this approach is to reduce the total acquisition cost for the acquirer.
• For example, an acquirer may offer $50 per share for only enough shares to assure the acquirer of majority control of a business, after which only $35 is offered per share for all remaining shares. This approach has two benefits from the perspective of the acquirer:
• (^) Cost. The overall cost of the tender offer is reduced, in comparison to a single tender offer at a higher fixed price.
• (^) Timing. The shareholders of the target company will be more likely to proffer their shares more quickly, in order to avoid being placed in the second tier and receiving an inferior compensation package at a later date.

PURE PARTIAL TENDER

OFFER

• A “pure partial tender offer” is defined as one in which there is no announced second-tier offer during the tender offer and no clean-up merger or tender offer closely following the execution of the tender offer. Partial offers are commonly used for less than 50 percent control of ownership in the corporation.

STREET SWEEP

• Investment strategy where a large portion of a company's shares are bought at one time. Most commonly, this occurs when an individual, group, or company is trying to takeover or gain control of another company. also called market sweep

SATURDAY NIGHT SPECIAL

• A Saturday Night Special is now an obsolete takeover strategy where one company attempted a takeover of another company by making a sudden public tender offer, usually over the weekend. This merger and acquisition(M&A) technique was popular in the early 1970s.

ANY-OR-ALL-TENDER OFFER

• An “any-or-all-tender offer” is where the bidder or raider will buy any tendered shares of the target corporation as long as the conditions of minimum number of tendered shares are met to insure majority control after the offer.

Stock repurchase

• (^) Stock repurchase (aka self-tender offer) is a purchase by the target of its own-issued shares from its shareholders. This is an effective defense that is widely successful.

Poison pill

• (^) Poison pill (aka shareholder rights plan) is a distribution to the

target’s shareholders of the rights to purchase shares of the

target or the merging acquirer at a substantially reduced

price.

• (^) What triggers an execution of these rights is an acquisition by

an acquirer of certain percentage of the target’s shareholding.

• (^) If exercised, these rights can considerably dilute the acquirer’s

shareholding in the target and thus can deter a takeover.

• (^) The poison pill is one of the most powerful defenses against

hostile takeovers.

• (^) The pills can be flip-in, flip-over, dead hand, and slow/no hand.

Staggered board

• (^) Staggered board is a board in which only a certain number of directors, usually one third, is reelected annually. It is a powerful antitakeover defense, which might be stronger than is commonly recognized. For the reason of being too strong and reducing returns to the target’s shareholders, the latter happened to resist this type of defense.

Shark repellants

• (^) Shark repellants are certain provisions in the target’s charter or bylaws deterring an acquirer’s desirability of a hostile takeover. This defense typically involves a supermajority vote requirement regarding a merger of the target with its majority shareholder. This defense also includes other takeover deterrent provisions in the target’s certificate of incorporation or bylaws.