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-Over Shadow pill

Flip-In Chewable pill

Back-End Plans BankMail pill

Voting Plans
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 Strategy
A 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 Squire to 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.
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