TAKEOVER DEFENSE STRATEGIES
Poison Pill:
This is a reference to the days when spies were told to take a cyanide tablet instead of being captured or, in this case, overrun. When it comes to the business world, the pill has a similar impact. Poison pills often refer to the issuance of preferred stocks (pills) at a discount to market value, making it impossible (poison) for a potential acquirer to purchase enough stocks to become a majority shareholder. The preferred stock is technically the "right" to acquire extra shares at a certain price tied to each share of stock[1]. Companies have employed a variety of poison pill techniques to combat hostile takeovers and corporate raiders. Offering a preferred stock option to present shareholders, for example, permits them to exercise their purchase rights at a substantial premium to the firm, making the acquisition suddenly unappealing. Another option is to incur debt, leaving the firm overleveraged and perhaps unprofitable[2].
Some businesses have established employee stock ownership schemes that vest only after the takeover is completed. Aside from diluting stock value, such employee bonuses may result in a staff exodus from the firm, leaving it without a skilled team (which is often one of the drivers of the acquisition)[3].
Another option would be to provide a succession of gold parachutes to corporate executives. This might also make the buyer's planned replacement of the company's top management prohibitively expensive. Finally, one non-financial poison pill strategy is to stagger the election of a business's board of directors, causing the acquiring company to face a hostile board for an extended period of time. In certain circumstances, the delay in winning control of the board (and hence the votes required to approve certain important decisions) is enough to prevent a takeover effort. A suicide pill is an extreme use of a poison pill[4].
Golden Parachute:
Recently, the golden parachute clause is in limelight after Elon Musk fired Parag Agrawal, Ned Segal and Vijaya Gadde from Twitter. The golden parachute entitles Parag Agrawal, Ned Segal and Vijaya Gadde to $122 million in compensation[5]. A golden parachute clause is a provision in a CEO's contract and other management executives' contracts that provides them with money or stock options if the company is bought and executives are liable to termination by the acquiring firm.
This payment provision is intended to make the hostile takeover more expensive by paying more than what is typically a lump sum payment to such target firm leaders. This approach is frequently used in conjunction with other takeover defensive strategies. The primary function of the Golden parachute in a hostile takeover is to align incentives between shareholders and target company executives, as there are generally concerns about executives facing a hostile takeover while risking job loss because they oppose the bid even if it increases shareholder value[6].
Crown Jewel:
In
mergers and acquisitions (M&A), the Crown Jewel Defense strategy is used
when the target business of a hostile takeover sells its most valuable assets
in order to lower its appeal to the hostile bidder. The crown jewel defense is
a last-resort defense because the target firm will purposefully destroy a
portion of its value in the expectation that the acquirer will withdraw its
hostile bid[7].
The Crown Jewel Defense strategy is employed in mergers and acquisitions (M&A) when the target business of a hostile takeover sells its most valuable assets in order to reduce its attraction to the hostile bidder. The crown jewel defense is a last-resort defense in which the target business intentionally destroys a chunk of its value in the hope that the acquirer would withdraw its hostile bid[8].
White Knight:
In
mergers and acquisitions (M&A), the Crown Jewel Defense strategy is used
when the target firm of a hostile takeover sells its most valuable assets in
order to lower its attractiveness to the hostile bidder. The crown jewel defense
is a last-resort defense in which the target company deliberately destroys a
portion of its value in the expectation that the acquirer would withdraw its
hostile bid.
Selling the crown jewels is equivalent to committing death; the board must be ready to almost kill the firm in order to rescue it from takeover. This is quite dangerous, and shareholders may object in some situations. As a result, selling the royal jewels is frequently a last option[9].
TAKEOVER STRATEGIES:
Bear Hug:
It is an offer made by one firm to purchase the shares of another company for a considerably greater per-share price than the company is worth. When there is skepticism that the target company's management will be willing to sell, a bear hug offer is frequently made. The name "bear hug" refers to the offering business's persuasiveness in making an unduly generous offer to the target company. The offering party may generally get an agreement by proposing a price well in excess of the target company's present value. Because it is legally required to look out for the best interests of its shareholders, the target company's management is practically compelled to accept such a substantial offer[10].
Leveraged Buyout:
A leveraged buyout (LBO) is the acquisition of another firm using a large amount of borrowed money (bonds or loans) to cover the acquisition costs. In addition to the assets of the acquiring firm, the assets of the company being purchased are frequently used as collateral for loans. The goal of leveraged buyouts is to allow firms to make substantial purchases without committing a large amount of cash. An LBO typically has a debt-to-equity ratio of 90%. Because of the high debt/equity ratio, the bonds are often not investment grade and are known as trash bonds.
Leveraged buyouts have a bad reputation, particularly in the 1980s, when numerous famous buyouts resulted in the collapse of the purchased firms. This was primarily because the leverage ratio was approaching 100% and the interest payments were so huge that the company's operational cash flows could not satisfy the commitment. It is paradoxical that a firm's success (as assets on the balance sheet) can be used as collateral against it by a hostile company that acquires it. As a result, some consider LBOs as a particularly cruel, predatory strategy[11].
Saturday Night Special:
An obsolete takeover technique in which one business tries to acquire another by launching a surprise public tender offer, generally over the weekend. When the Williams Act required only seven calendar days between the time a tender was publicly posted and its deadline, this merger and acquisition (M&A) approach was common. Often, the purchasing corporation had an edge by catching the target company off guard and over the weekend, essentially restricting its time for a response. A tender offer is essentially an effort to seize control of a firm by requesting shareholders to sell their shares at a predetermined price (usually above market). If a sufficient number of stockholders sell their shares, the takeover is accomplished[12].
Dawn Raid:
When a corporation or investor buys a large number of shares in a company first thing in the morning when the stock markets open, this is known as a dawn raid. Because the bidding firm acquires a large share in its target at the current stock market price, the acquisition expenses are likely to be much cheaper than if the acquiring company launched a formal takeover offer first. The corporate dawn raid, like the dawn raid in battle, is carried out early in the morning, such that by the time the target discovers it is being assaulted, it is too late - the investor has already acquired some controlling interest. However, only a minority stake in a company's stock can be purchased in this manner. As a result, following a successful dawn raid, the raiding business is likely to launch a takeover proposal to buy the remainder of the target company[13].
[1] Naryanan
V, Poison pill and its effectiveness in thwarting hostile takeovers, The Hindu Business Line (April 25, 2022
03:40 PM) https://www.thehindubusinessline.com/blexplainer/poison-pill-and-its-effectiveness-in-thwarting-hostile-takeovers/article65352988.ece
[2] Devika
Rana, Swallowing the Poison Pill - A bitter taste or a sweet escape?, Gravitas Legal https://gravitaslegal.co.in/articles-demo-detail.php?pid=3
[3] Krishna Veera Vanamali,
What is a 'poison pill' strategy & why has Twitter adopted one?, Business Standard (April 19, 2022 07:00
AM) https://www.business-standard.com/podcast/management/what-is-a-poison-pill-strategy-why-has-twitter-adopted-one-122041900048_1.html
[4] CFI
Team, Poison Pill, Corporate Finance Institute (July 7, 2022) https://corporatefinanceinstitute.com/resources/knowledge/deals/poison-pill-shareholder-rights-plan/
[5] Pragatti Oberoi, What
Is A Golden Parachute, Handed Out To Parag Agrawal By Elon Musk?, Outlook India (Oct 31, 2022 2:11PM) https://www.outlookindia.com/business/what-is-a-golden-parachute-handed-out-to-parag-agrawal-by-elon-musk--news-233684
[6] Aron Almeida, What
is a Golden Parachute? Pros, Cons, Uses and Examples, Trade Brains (May 30, 2022) https://tradebrains.in/what-is-a-golden-parachute-pros-cons-uses-and-examples/
[7] CFI Team, Crown
Jewel Defence, Corporate Finance
Institute (Oct 28, 2019) https://corporatefinanceinstitute.com/resources/knowledge/deals/crown-jewel-defense-takeover/
[8] Adam
Hayes, Crown Jewels, Investopedia (April
26, 2022) https://www.investopedia.com/terms/c/crownjewels.asp
[9] Annapoorna, White
Knight, ClearTax (Sep 25,
2022) https://cleartax.in/g/terms/white-knight
[10] CFI Team, Bear Hug,
CORPORATE FINANCE INSTITUTE (Oct 14, 2019) https://corporatefinanceinstitute.com/resources/knowledge/deals/bear-hug/
[11] Will
Kenton, Leveraged Buyout (BYO) Definition: How It Works, with Example, Investopedia (June 19, 2022) https://www.investopedia.com/terms/l/leveragedbuyout.asp
[12] Saturday Night
Special, Finance Reference https://www.financereference.com/saturday-night-special/
[13] Dawn raids: dealing
with inspections by competition authorities in the UK, Ashurust https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide---dawn-raids-dealing-with-inspections-by-competition-authorities-in-the-uk/
PS- The information above doesn't form a legal opinion. The article is shared merely for educational and informational purposes.
About the Author: This post is prepared by Muskaan Singh, Law student at UPES, Dehradun. She can be reached at muskaan.singh2930@gmail.com
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