Defence against hostile takeovers

29 August 2009 |

Every group is potentially subject to takeover.  There will be a price at which the shareholders may be induced to sell their shares. If the bid is received, then the directors may consider and recommend accepting the offer to the shareholders. A problem arises when a publicly quoted company receives an unwelcome bid with a clear objective of buying the group at a price below the value that the management put on it.

How to defend against hostile takeover - Strategies
  • Pac-Man defence
A defensive tactic used by a targeted firm in a hostile takeover situation. In a Pac-Man defence, the target firm turns around and tries to acquire the other company that has made the hostile takeover attempt. This term has been accredited to Bruce Wasserstein, chairman of Wasserstein & Co.
  • Poison Pill 
The target company attempts to make its stock less attractive to the acquirer. 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. The "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.
  • Crown jewel defence
The crown jewel defence 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. Consequently, the unfriendly bidder is less attracted to the company assets. Other effects include dilution of holdings of the acquirer, making the takeover uneconomical to third parties, and adverse influence of current share prices.
  • Scorched-earth defence
When a target firm implements this provision, it will make an effort to make it unattractive to the hostile bidder. For example, a company may agree to liquidate or destroy all valuable assets, also called "crown jewels", or schedule debt repayment to be due immediately following a hostile takeover. In some cases, a scorched-earth defence may develop into an extreme anti-takeover defence called a "poison pill".
  • Golden parachute
A golden parachute is an agreement between a company and an employee (usually upper executive) 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.  
  •  Fatman
The targeted company acquires a large and/or under performing company in order to decrease it attractiveness to the raider.

Other defences are also used against hostile takeover.


Sources: Wikipedia , Investopedia


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