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Hostile takeover defenses

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It is comprehensive Presentation covering all the aspects of Takeover defenses like ...

It is comprehensive Presentation covering all the aspects of Takeover defenses like
Active Takeover Defense and Preventive Take over Defense
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Hostile takeover defenses Hostile takeover defenses Presentation Transcript

  • Hostile Takeover Defenses-I
    -Goutham G Shetty
  • 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
  • Proxy Fight
    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.
  • 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 rights
    E.g..
    Ford Motors
    Berkshire 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 pills
  • 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 place
    A 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 consideration
    E.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 Company
    Large 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 Squireto 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 Target
    Eg.
    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.
  • Thank You