Defenses Against Hostile Takeovers


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strategies required to implement to prevent your company from hostile takeovers...

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Defenses Against Hostile Takeovers

  2. 2. ACKNOWLEDGMENT The Project on MERGER AND ACQUISITION has been made and completed under the guidance of our respected professor RAMAKRISHNAN. He has helped us in the learning about this topic and giving us valuable insight knowledge about how the merger and acquisition is performs and how it works. I would like to thank him for giving his cooperation, guidance and enriching my thoughts in this field without his guidance I would not have able to complete this report on Merger and Acquisition.
  3. 3. Defenses against Hostile Takeovers Bidder Strategies Steps before making an offer: • Find appropriate target o Bidder makes acquisition criteria o Firm’s acquisition team and external advisors come up with suggestions, make short list o SWOT analysis of:  Quality of management  Industry status of target  Future technological and competitive evolution in industry  Target’s financial & stock market performance o Make valuation of target as it would be under bidder’s management, do sensitivity analysis o Get confidential guidance about antitrust implications o Will target litigate? o What response will target management make?  Personalities  Motivations for sale  Management’s relationship to target  Desire for independence  Post-acquisition expectations  Stake in target  Preference for cash or shares
  4. 4.  How receptive to bidder’s post-acquisition plans Objectives of bid tactics: • Win control of target • Minimize control premium • Minimize transaction costs • Smooth post-acquisition integration Options for gaining control: • Toehold o May lower cost of acquisition o Increases chances of securing majority control in bid o May give bidder same rights as other target shareholders, e.g., start proxy fight o May profit from greenmail o Discourage other bidders o Can get stuck with less than controlling stake
  5. 5. o If toehold exceeds 20%, merger accounting not available o If 10% or more purchased for cash within 12 months, bid may have to be for cash at highest price paid o May give target advance warning, and target may be put ’in play’ • Casual pass o May learn that target receptive to offer o Gives target advance warning • Bear hug o Could result in negotiated deal o May be waste of time, give target advance warning • Open Market Purchase/Street Sweep o More likely to be effective if shareholding is concentrated o Legal limits on how much can purchase without making tender offer o Some shareholders could hold out for high price, especially arbitragers o Could suffer large losses if takeover attempt fails
  6. 6. • Tender Offer Criteria:  Active and widespread solicitation of public shareholders  Solicitation made for substantial percentage of the stock  Offer to purchase made at a premium over prevailing market price  Terms of offer firm rather than negotiated  Offer contingent on tender of fixed number of shares, often subject to fixed maximum number to be purchased  Offer open only a limited time  Offeree subject to pressure to sell his stock  Public announcement of a purchasing program concerning target company precede or accompany rapid accumulation of large amounts of target company’s stock o Used when friendly negotiations not a viable option  Receive less information about target  Tends to be more expensive
  7. 7.  Less smooth post-acquisition integration  May lose target management  Lower target employee morale, increase fear and anxiety o Double-barreled offer o Two-tiered tender offer o All-cash bid for any and all shares o Partial tender offer o 3-piece suitor Proxy contests • Objectives: o Remove board of directors o Rescind antitakeover devices o Pay dividend o Sell • Less expensive than tender, but still costly
  8. 8. • Only minority of proxy contests succeed, but change often occurs soon after anyway Example of Bidder Strategy 1. Market purchases of up to 10% 2. Introduce tender just after target reports bad news 3. Advertising and lobbying campaign, targeted at politicians, target employees, pension funds, unions, target shareholders (especially blockholders) Negative points about target to stress: a. bad strategy b. inept management c. poor performance d. unrealistic profit forecast e. highlight hocus-pocus in target’s accounts Positive points to stress:
  9. 9. a. improvement in target shareholder wealth b. bidder’s superior management performance c. bidder’s plans for growth – including any new employment opportunities in the region Defense Strategies Objectives: • Prevent takeover • Maximize takeover premium Think about potential bidder’s objective: acquiring firm with maximum value to it at the lowest price Strategies to raise the price: • Improve operational efficiency and reduce costs • Pay or promise to pay higher dividends • Inform analysts about company strategy, financing policies, and investment programs
  10. 10. • Announce profit report/forecast • Asset revaluation • Share repurchase • Terminate overfunded pension • Start international partnership • Recruit rival bidders • White knight • White squire Strategies to lower the value to the potential bidder: • Make the deal harder to finance • Use up excess cash  Pay dividend  Buy assets
  11. 11. • Sell valuable securities portfolio • Spin off subsidiaries, sell properties that could be sold without significantly impairing cash flow • Increase leverage  Buy assets  Share repurchase  Debt for equity swap • Terminate overfunded pension fund • Change ownership structure • Dual-class shares • Share repurchase • Scorched earth policy • Purchase assets that would cause antitrust problems for bidder • Joint venture with partner that bidder does not wish to liaise with • Shark repellents • Supermajority amendments
  12. 12. • Fair-price amendment • Staggered boards • Authorization of preferred stock • Abolition of cumulative voting • Reincorporation • Lock-in amendments • Poison pills  Flip-in  Flip-over  Dead-hand provision • Poison puts • Sell crown jewels • Establish employee severance packages • Golden parachute • Silver parachute
  13. 13. • Tin parachute Other strategies • Monitor share register for unusual share purchases, force disclosure of identity of buyers • Cultivate shareholders and investors • Cultivate constituencies (unions, workforce, customers, suppliers) • Accept social responsibility to improve social image • Advertising campaign • Regulatory appeal • Litigation • Red herring • Greenmail • Standstill agreement • Pac Man Defense Arcelor-Mittal Takeover Case
  14. 14. • Mittal makes surprise €18.6 billion bid for Arcelor in January 2006 • Arcelor management announce large dividend • Arcelor makes very positive profit report, which is later found to be inflated • Arcelor makes rosy forecast for future performance • Arcelor management and European politicians criticize Mittal • Arcelor management refuses to meet with Mittal until a string of demands were met • Arcelor tries to get Luxembourg government to write a takeover law shutting out Mittal • Arcelor unions fear job cuts, reduction in social standards • Arcelor managers fear Mittal will shift emphasis from long- to short-term goals
  15. 15. • Arcelor commits to buy North American steel company that will cause Mittal anti- trust problems o Agreement contains clause making it costly to not go through with sale • Arcelor made €13 billion deal with Severstal of Russia, including break-up fee of €140 million • Arcelor, Mittal, and Severstal engage in heavy advertising, meetings with investors and politicians • Arcelor arranges for shareholder meeting where Severstal deal would be approved unless 50% plus one of shareholders were present and voted it down, an unusually high percent. The meeting isn’t scheduled until after Severstal deal has been nearly finalized. • Mittal raises offer to €26.5 billion, and agreed to cede some management control and family voting rights o nearly double the price per Arcelor share Arcelor was trading at prior to Mittal’s bid in January • Arcelor’s institutional shareholders and hedge funds voice disapproval in Severstal deal, support Mittal deal o Arcelor management fears shareholders will vote down share buyback necessary for Severstal deal to go through o Shareholders threaten to oust Arcelor management and sue Arcelor board
  16. 16. • Six percent of Arcelor shareholders sued Arcelor’s board for selling for too low a price o Unlikely to succeed, given very high premium on Arcelor shares relative to pre-takeover-battle price • Arcelor-Mittal sells valuable Maryland steel mill in August 2007 to satisfy U.S. anti-trust authorities Mittal’s Letter to Arcelor Shareholders, June 20, 2006 Ladies and Gentlemen, It has been almost five months since we first made the offer to you to have Arcelor join forces with Mittal Steel to create a European-based global champion in the steel industry and to make, together, a quantum leap in the consolidation of our industry. The transaction has now reached a critical phase, and we wanted to share our perspective directly with you. In an attempt to resist a combination with Mittal Steel, the Arcelor Board is now seeking to merge the company with SeverStal, a steel company controlled by Alexei Mordashov with assets principally in Russia and listed on the Moscow Stock Exchange. The Arcelor Board claims that this is a legitimate and superior alternative to a combination with Mittal Steel. We strongly disagree. • We believe that the transaction with Alexei Mordashov gives him control over Arcelor; yet, the transaction has been structured to allow him not to make an offer for the whole company, let alone pay a control premium. • The Arcelor Board is proposing to proceed with this significant transaction without seeking a positive vote from shareholders; they plan to proceed unless Arcelor shareholders holding together more than 50% of the capital vote against it. We
  17. 17. believe this process does not give you a proper say in this transformational transaction for your company. • Lastly, the Board could use the agreements with Alexei Mordashov as a poison pill against our bid: even if holders of more than 50% of the current capital elect to accept our offer, the Board can take majority control away from us by issuing new shares to Alexei Mordashov after completion of our offer. Mittal Steel is a substantially bigger, more diversified, and more profitable company than SeverStal. It is the number one steel producer in the world. We have better and more diversified mining assets than SeverStal. Only the Mittal Steel – Arcelor combination would be a truly transformational deal for the steel industry. A combination with Mittal Steel will also deliver substantially more value to you. Based on the weighted average value of the Mittal Steel stock since announcement of our proposal on January 27, our offer values each Arcelor share at a premium of more than 70% over the pre-offer value of Arcelor on January 26 of €22.22, which itself was an all-time high for the company. The implicit valuation of the Arcelor share in the context of a transaction with SeverStal is significantly inferior to the one which will result from a merger with Mittal Steel – especially when one takes into account the very significant upside potential generated from our Value Plan, and the related undervaluation of the Mittal Steel stock today. We believe that neither the contemplated partial buy-back by Arcelor, nor the terms of the Severstal transaction establish a value of €44 a share for Arcelor. We firmly believe that the future of Arcelor warrants a real choice – one that has to be made by you, the owners of the company. Unless there is a veto by holders of more than 50% or more of the capital on June 30, control of the company could be transferred in a value destroying transaction. This is a critical juncture in the life of Arcelor.
  18. 18. Your participation in the June 30 meeting is critical. We strongly encourage Arcelor shareholders to exercise their veto right at this meeting and vote against the SeverStal project. Market reactions to defense tactics: • Market responds especially favorably to LBO announcements, also positively to leveraged recapitalization announcements • Antitakeover amendments have an insignificant or slight negative effect on shareholder value on average • Antitakeover devices appear to reduce the probability of takeovers by only a small amount • Antitakeover amendments have more negative effect when: o Low % institutional shares o High % insider shares o Low initial % CEO shares o Low initial % board of director shares o Board dominated by insiders and affiliated outsiders o CEO also chair of board
  19. 19. o When inside and affiliated outside board members increased their ownership stake as a result of antitakeover devices • Takeover premiums higher when target firms protected by state antitakeover laws or poison pills • Firms protected by state antitakeover laws have lower shareholder returns, have worse accounting measure performance than those opting out • Firms receiving protection from state antitakeover laws reduced debt ratios, undertook fewer major restructuring programs (weak evidence) than firms not receiving protection • Voluntary spin-offs result in insignificant returns in firms which had adopted antitakeover devices in the previous 6 months, while voluntary spin-offs by other firms result in positive returns • Only earliest poison pills associated with large declines in shareholder wealth • Poison puts result in gains to bondholders, losses to shareholders • Mixed results on impact of golden parachutes o Alignment hypothesis
  20. 20. o Wealth transfer hypothesis o Signalling hypothesis • Reincorporations to limit director liability resulted in positive returns, while those to establish stronger antitakeover defenses had significant negative returns DESCRIPTION OF STRATEGIES Poison Pills To avoid hostile takeovers, lawyers created this contractual mechanics that strengthen target company. It's a generic name that makes reference to some protection against unsolicited tender offer. One usual poison pill inside a Corporation Statement is the clause which triggers shareholders rights to buy more company stocks in case of attack. Such action can make severe differences for the raider. If shareholders do really buy more stocks of company with advantaged price, it will be harder to acquire the company control for sure. Today it's not some plain matter. There are advantages as well disadvantages. A poison pill really seems to make raider's plans a little more complicated. But nowadays it's accused to further protect management Counsel and directors. Some conservative corporations still dismiss this kind of protection. The main idea is that, far the best defense strategy is to keep shares high priced, and well valued. This means making the corporation performance its own takeover defense. Problems of Poison Pills Among the problems, there´s always the high cost generated by poison pills. It also can keep good investors away, and can make some future healthy partnership more complex. It means that any joint venture for example will have to bypass the approval of all investors, in a more sensitive way.
  21. 21. Disarm a poison pill is also complicated. Generating rights its easier than keep them away of the company. Once armed with a poison pill, the corporation will always have to face investors satisfaction with overall conduct. Anytime, whenever a merger occurs, some investor can make all the process a lot more complex. For sure, one straight consequence of it, is that merger operations have a higher price. Having to take in account poison pill possible triggering by shareholders. Even whenever there´s a friendly takeover, with conflict among shareholders interest. Stock option workout Poison Pill may have the same structure of stock options used for payouts. Under these agreements, once the triggering fact happens, investor have the right to turnkey some right. In poison pill event, most common is an option to buy more shares, with some advantages. Priced with better conditions, lower than what bidders does for the corporation. For the specific purpose of protecting the corporation current shareholders. The usual stock option is made to situations of high priced stocks. That usually happens under takeover operations. A takeover hard to be defended usually will have a bid offer with a compatible price, at that moment. Compatible, meaning higher than usual for shareholders, with conditions to be accepted by stockholders. Shareholders can exercize rights to keep themselves stake position inside the corporation. More Effective Ways to protect the Corporation In fact, the best way to protect a corporation is a good performance and a market maker to keep shares sustained and well priced. With shares well traded, the corporation will have realistic standards, even to face a merger event. If shares performance is somehow weak, chances to be raiders target are stronger than if not. The weak stock performance is the perfect situation for raiders, and usual situation that triggers poison pills as well. In fact, the combination of takeover defense tecniques, is the best protection. There are plenty of takeover cases that left precious lessons for defenders. The combination of strategies, and the correct sequence can make the transition less sharp than if not. Most important of all, if possible can further try to guarantee the corporation lifetime instead of its market share valueand nothing else. Shark Repellent Shark Repellent it's a generic term related to strategy of takeover defense. Any company that intends to prepare itself against unsolicited bidders has several ways to avoid it. There are several measures that can be taken in order to respond a raider attack. Among shark repellent instruments there are: golden parachute, poison pills, greenmail, white knight, etc.
  22. 22. Anyway it shall make some effect against bidders. In US today, the streamline is the discussion of shark defense strategies as corporate governance politics, faced by shareholders interest. There's a lot of controversy over this issue, and in many cases it can only be solved within the Court. The question today is not only whether creating a bullet proof strategy or not, neither to keep defenses, the discussion is about shark repellent efficiency. Such mechanics originated in 80's decade with aggressive takeovers fueled by junk bonds. Those historic leveraged buyout operations originated protection concepts that somehow is part of most US stock public companies. However, it's something not unanimous anymore. These provisions are accused of protecting in excess management, creating unreal prices, and keeping away even good bidders. In some companies, it can even ignore shareholders interest. The ones with real interest in company results at least. More than financial tricks, these bullet proof clauses are now being decided in Courts all over America. The main point is not only corporate governance, management, and holding control. Further its a discussion that really matters for shareholders that stood aside in the past. From all the thesis available, standpoints and all, something is quite acceptable for everyone: the best raiders defense is a good stock performance. Translation of company behave within its own market area. If some corporation has good standings, and if existing some takeover defense culture, an attack will ever be quite a challenge. If unsolicited, avant investment bankers and prime corporate lawyers still make the job. Otherwise, it may be a natural solution for a crisis company without any perspective. White Knight Another fortune way to handle a hostile takeover is through White Knight bidders. Competition is ever a serious factor in any market field. Usually players of some specific market, know each other for a long time, even if from different countries. They know each ones history, strategy, strength, advantages, clients, bankers and legal supporters. Meaning beyond similarities or not, there're communities around theses companies. An unsolicited bidder more than an offensiveness, has a chain reaction over that entire market field. Even traditional corporations are not free of billion raiders that wants to run the market. Or maybe, it's about a bidder without any common work concepts that could make promise a good union. Several are the reasons, an hostile act itself seems not something friendly. Under these circumstances, investment bankers can achieve a White Knight raider to also play against the unsolicited takeover. The White Knight presence and play, may have at least two main effects. First it can push the hostile takeover bid till the edge, and break-even point. Second, if result in attack quit, a new megacorporation can surge, stronger than ever. For the target company is a good strategy, once it makes takeover defense mostly to be decided in the stock exchange, between bankers, traders, analysts. Commonly, if results a White Knight union, sometimes it's just an alliance already studied and waited for both. Anticipation of alliances can be unexpected but nevertheless, market may prove it was right.
  23. 23. Same Philosophy of Job The merger may not be the best end and begining of it all. A partnership may be the proper way for both corporations. A joint venture without the creation of a third company may be the exact solution. Creating a huge corporation may cause a confusion of corporation identity hard to be undone if necessary. Nowadays, keep doing all the workout together, may be enough for both corporations. For the White Knight, the merger may be not only out of future plans, but can also create commitments not expected. If there´s a similarity of work strategy and management, this may be enough for a partnership. From a realistic standpoint, a White Knight can carry out the corporation into more problems instead of making it stronger. White Squire To avoid takeovers bids, some shareholder may detain a large stake of one company shares. With friendly players holding relevant positions of shares, the protected company may feel more comfortable to face an unsolicited offer. A White Squire is a shareholder than itself can make a tender offer. Otherwise it has so much relevance over the company stock composition, that can make raiders takeover more difficult or somewhat expensive. Real White Squire does not takeover the target company, and only plays as a defense strategy. In order to defend these companies, some bankers organize funds for that specific purpose. A White Squire fund is designed to increase share participation in companies under stress. Structured to make defense positions for several corporations, till the takeover chance is on. Originated from the 80's era of junk bond takeovers, these funds workout as a rescue raider against attackers. With all the strength of private equity funds, its expertise of dealing with billion digit funding. These ones have controversy around. One possible situation is related to specific issue of shares. The corporation joined with the White Squire can agree to make a special issue of shares, for takeover defense purpose. But if the hostile bid does not happen. Then a huge operation has been made, that probably had effects for share prices, and others shareholders position. This to not mention if is made not for a White Squire fund, but to some particular investor. This tactic is also a wide discussion today, balancing management, holding controllers, corporate governance and shareholders rights to take such decision. Leveraged Buyout In 80's it was the soul of yuppie era. To raider a megacorporation with junk bonds, was considered genius touch. Pure magic to takeover a greater corporation, and set up your own board of directors overnight. Stock markets spot these sound operations. The term leveraged buyout is related to takeover operations with risky strategy. Usually meaning a minor company
  24. 24. making a takeover bid for a major company, based in sophisticated banking mechanics to finance it. In 80's junk bonds were the stars. Junk bonds are related to securities of middle and small cap corporations. They do not stand at the same grade of a blue chip stock. Are risky securities, with restrict liquidity, and therefore can skyrocket even more. Large corporations shares normally have a stable performance. Whenever a junk bond has a continuous high, beyond any math, can cash it for a leveraged buyout use. A raider can make a tender offer even against some blue chip to be paid with these junk bonds. Problem is that a corporation is not only stock performance and aggressive investment bankers. Even with a takeover is made complete, there's a problem related to management. Not in terms of CEO and board of directors outstanding stars. Each corporation has an expertise and know- how within its markets field. Experience that tells what works and what does not. It's not related only to corporate finance, treasury, and banking magic. Leveraged buyout does make a shakeout over the corporation, and the entire market. But does not always mean a holding with specific and enough expertise to manage afterwards. Today, still leveraged buyout magic are on the stage. Sometimes one operation following another. Like when a corporation takeover a first one, and then use assets of the first one to finance a takeover against a second one. Complex banking play. But today these moves are not new anymore, and there's a lot of investment bankers and attorneys familiar with all this world. Greenmail This practice is not a kind of takeover defense in terms of protecting a corporation. Means much more an attitude of recognizing a raider force, and premium to be free of the attack. There's a long controversy around it, once its not fair for shareholders to pay premium for raiders. The discussion shakes all shareholders, once sometimes they are not the management one whoever decide theses payments. If paid, it can bring the certainty of takeover free at least from that bidder. But it has effects, and some studies conclude that as consequence shares has a decline. Some countries forbid such hostile takeover behave. Its a wide discussion ended in Courts, whenever shareholders interests and vote face takeover defense of management and controllers. The great controversy is about fairness of paying these millionaire premiums for attackers. If it is really the way to be. For the free market standpoint, it can push target company toward. By considering such possibility, some companies do really make strong needed restructuring. Stepping through some reforms that can improve its performance. Instead of letting the corporation by its own, pressure for necessary measures that can be healthy. Greenmail pushes aside that hostile bidder. But by a millionaire premium it can further boost interest of raiders and megainvestors all over, searching for a good opportunity. For that reason
  25. 25. qualify it as a defense may be not quite proper. It recognizes an unsolicited offer and risk, and shareholders may take a burden of something they're apart. Golden Parachutes Officers need some protection against these operations. In time of takeovers rally without any provisions about it, an officer cannot make his job out of pressure. Golden Parachutes are already part of corporate management culture, in case of hostile takeover. Without it, officers have no stability, and it may represent inaccurate defense strategy in case of bidders pressure. Can further accelerate drastic and unnecessary measures. From an overall analysis, cost of golden parachutes are relatively low, compared with disadvantages of its absence. Officers can have minimum guarantees after takeover is accomplished. Otherwise inappropriate attitudes can be taken just to keep officers standings in the market an inside the corporation. Golden parachutes tries to make these challenge for the corporation and over officers, as natural as possible. Studies show that these benefits can keep chiefs working without excess pressure and drama. Defending the corporation against all, till the end, but with responsibility. • The Golden Parachute is a provision in a CEO's contract. It states that he will get a large bonus in cash or stock if the company is acquired. This makes the acquisition more expensive, and less attractive. Unfortunately, it also means that a CEO can do a terrible job of running a company, make it very attractive for someone who wants to acquire it, and receive a huge financial reward. • The supermajority is a defense that requires 70 or 80 percent of shareholders to approve of any acquisition. This makes it much more difficult for someone to conduct a takeover by buying enough stock for a controlling interest. • A staggered board of directors drags out the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered, so that some members are elected every two years, while others are elected every four. Many companies that are interested in making an acquisition don't want to wait four years for the board to turn over. • Dual-class stock allows company owners to hold onto voting stock, while the company issues stock with little or no voting rights to the public. That way investors can purchase stocks, but they can't purchase control of the company.
  26. 26. • In addition to takeover prevention, there are steps companies can take to thwart a takeover once it has begun. One of the more common defenses is the poison pill. A poison pill can take many forms, but it basically refers to anything the target company does to make itself less valuable or less desirable as an acquisition: • The people pill - High-level managers and other employees threaten that they will all leave the company if it is acquired. This only works if the employees themselves are highly valuable and vital to the company's success. • The crown jewels defense - Sometimes a specific aspect of a company is particularly valuable. For example, a telecommunications company might have a highly-regarded research and development (R&D) division. This division is the company's "crown jewels." It might respond to a hostile bid by selling off the R&D division to another company, or spinning it off into a separate corporation. • Flip-in - This common poison pill is a provision that allows current shareholders to buy more stocks at a steep discount in the event of a takeover attempt. The provision is often triggered whenever any one shareholder reaches a certain percentage of total shares (usually 20 to 40 percent). The flow of additional cheap shares into the total pool of shares for the company makes all previously existing shares worth less. The shareholders are also less powerful in terms of voting, because now each share is a smaller percentage of the total.
  27. 27. BuyBack Buyback its not exclusively related to takeover defense. It's usual for any company to buyback outstanding shares if prices are low. Something natural, and is a common task of a corporation treasury desk. Whenever there's a high demand for more shares, and its quotation is high and sustained, company usually issue shares. This way, increasing the outstanding amount of some company shares. In event of bull market, it can be more than a need, once the existing shares valuation can skyrocket. The opposite situation also need proper response. In bear market, prices are usually low, in general. Huge quantity of some company outstanding shares does not make sense. If let by itself, prices can decline even more, making this a stability matter in fact. A low spiral is dangerous, once some absurd situations can occur as well they happen in highs. If for spot market a consider low quotation deserve some attention, even more when considering derivatives and future markets. For what it does matter, it can put a corporation on verge of some takeover. Lows can affect corporations in general, and the entire stock exchange blue chips. As well for raiders. Problem today is that world lives a globalization age, for banking also. In this exact moment, maybe some foreign stock exchange can be experiencing a isolated high, specific for that area. Then, a raider may appear not from a local or national area, but from a worldwide arena. Treasurers manage share prices of the company regulating its quantity over the stock market. Its also a traditional takeover defense, trying to keep share prices under some control. As long as far the best defense against hostile takeover is high shares value. Reducing outstanding quantity of some company shares in the stock market, can push toward a valuation of the shares available. Gray Knight Under the greatest chaos, there's always someone with midas touch. If a hostile and unsolicited takeover is something serious for any corporation, its bankers, investors and employee what to say about a third raider. Surprise can be not some new, but it makes the financial and due diligence mess really mean it. An odd opportunity can emerge for the Gray Knight, scanning any market move to leverage itself. As a third player it seems to have at lest three times reviewed operation. If have decided to make part of that mess, maybe has its reasons. But a Gray Knight raider usually is someone that belongs to all the play. Just a corporation, fund or investor that understand what's on can move the chess right. This third raider surely have enough know-how about it all, and had maybe planned to be a original first unsolicited bidder. To do not be out of it all, Gray Knight can make an tender offer long ago planned sometime. Seems opportunistic, but can be the dynamic of stock market at that moment or for that market economic field.
  28. 28. For that reason, Gray Knight can be a signal of hard ways to avoid takeovers. Against two bidders competing between, the share bid price will rise. As much as share prices rise more difficult become to block the takeover. Anyway armed with so many takeover defenses, its quite a buzz, but at least it can be a good deal wayout. Scorched Earth Takeover bids normally happens over corporations with some crown jewells. One of takeover defenses consists in making target company unattractive for raiders. This strategy can be implemented by several ways. Like selling or spining off valuable assets, taking serious risky treasury cash management, or with fullfilment of corporate liabilities. Also a defense that pushes to the edge the corporation itself, but my be effective. If all of it is worth the play, that's the question. Scorched Earth tactic may be some slight attitude as well. Instead of coordinated actions, closer to some sort of Jonestown Defense, specific and precise move can be made. For example, if what's all about is a technology developed, there are several ways to bullet proof access to it or not. Ownership of it can be of a third corporation with nothing to do with the original one, at least officially. A takeover bid may also trigger an acquisition of some minor corporation by the target company. But if by acting this way, the target company inherit indebtness from this minor company, it can make a difference. Or by making a bid, it does can trigger a selling movement of precious assets by the target company. Anyway it's a confuse defense tectic. Sometimes, board of directors have enough powers to manage like this. But will ever be a controversy against shareholders vote and interest. If this is the right chessmaster move. To be decided also on Courts. Show Stopper Merger and Acquisitions operations are complex deals with multiple consequences in the market chess. Those operations touch thousand of employees, with significant tax effects, and also with geopolitical influence. Settle or not an industry within a state or county represents an activity that changes the profile of a region. So, allow these operations to take effect, usually needs government approval. There are several antitrust laws, health, financial, and environmental laws to be accomplished. It's not a decision restricted to board of directors and holdings. For example if what's in discussion is an energy company, like petroleum or water, it will not be a single takeover bid. What really matters is the ultimate resources that will be available for the entire population, around these corporations areas. Not only the future price policy, but the resource quality and disposal itself. Not only oligopoly is combated. Competition is one aspect that make capitalism work. Besides all the antitrust policy, each economic field has its owns requirements to workout. Government
  29. 29. controls overall economic activity in behalf of the entire society interests. It's not only about income, dividends, and return. Economic policy has in mind keeping the services working well, and in a regular and satisfactory for the population. Some Merger and Acquisitions operations, besides seeming midas magic, have a harmful profile for the population over the long-term. Whenever there's a real chance of it, Government can set up conditions and requirements in order to make it work. Jonestown Defense This is a radical attitude against hostile takeover canvas. Seems nuts for most people, and always needs a double check over the corporation history to understand this act. For example, competition can be much more related to greed than about efficiency. Usually officers, CEOs, and holding families know each other, and this is kind of tradition. Selling a corporation, can be further than transferring assets ownership. Sometimes, it can mean something so serious that controllers prefer to play against the odds. The forgotten chance can be the deal for players that surely does not welcome the raider. Also, there are situations wherever the target company will only have disadvantages in a eventual merger. Maybe acting with radical ways will not turn over the play, but can save some scarce assets, if any. Increasing company debts, selling crown jewels, seems suicidal nonsense. But desperate of hostile takeover, that even investment bankers cannot handle, puts these possibilities in discussion. As stressed before, if takeover can be very harmful for employees and management of target corporation on the long-term, on short, can be worse. Some critical companies, that in past where major players, may request severe plans. Some raiders will tend to let proud aside and make necessary changes. Results and forecast are ever a quiz. Anyway, that's a radical way of facing a takeover. Until reaching this red line, there lots of strategies, defenses, tactics, legal mechanics, ideas and banking ways to make use of. A severe problem, is ever quite a quiz in that precise economic and historic moment. But nowadays, investment banking and corporate law has so many instruments, for most of cases, tested and matured along years of corporate finance history. Standstill Agreement Takeover operations environment has the law offices as one of the principals. Any Merger and Acquisition movement is related to lots of documents, securities laws, working along financial data. Standstill Agreement is a kind of contract used for several situations, whenever usually there's something complex on the stage. Time to take some breath and go on the deal more prepared for the complicated questions. Bidders does not want any standstill, and if vested as an agreement, that's something hard to agree.
  30. 30. For that reasons, a standstill agreement does not appear alone. It's usually as instrument, and part of a takeover defense dynamic. One common situation is an increase of some shareholders stake. If considered some potential takeover chance, target company can buyback these potential raider shares. Enough to activate a standstill agreement or to zero any takeover chance at all. By making a standstill, even if paying a premium, the target company will have more time to armor itself. It's an instrument that appears under some dealing process. But also can surge for example, related to legal and economic problems. Economy represents not only banking, stocks, dividends and returns. Sometimes, government may seems to be only observing Mergers and Acquisition activity. If what's on the deal are lots of jobs, infrastructure, society interest and so on, it's a political matter, that request government acquiescence. Huge operations, takeover bids or not may be frozen under government authorization. Somewhat it can work or be an official standstill agreement, until is properly approved. The standstill can make all the difference for the target corporation. Time can provide framework to face an hostile takeover. Realized surprise can shakeout the entire day-by-day of the entire company. Besides all, after years of operations like that, investment bankers and attorneys developed a lot of expertise to manage it, that does make the difference. Pacman defence This defence, named after the videogame,consists of a counter-purchase by the target of the shares against its attacker. In some cases it will suffi ce to buy even a small fraction of shares of the attacker to be able to initiate legal claims against the attacking company in the capacity of minority shareholder. Sometimes the company will be unable to buy the shares of a raider due to the lack of readily available funds or for some other reasons, e.g. the shares of the attacker are consolidated in the hands of shareholders friendly to the attacker. In this case the company or the persons affi liated with the company may start to acquire other tools of infl uence on the attacker or the business group it belongs to, e.g. rights of claim, debts, bills of exchange.