Defenses Against Takeovers
Following are the defenses against takeovers in mergers and acquisition;
1. Stock Repurchase
One common way to avoid acquisition is target firm buybacks its shares. The firm would buy the shares from majority shareholders by paying premium, by doing so they possess all the voting power and reject the offer made by the acquirer. This strategy is also known as self -tender offer
2. Shark Repellents
As the name shows are used by the firm to avoid takeovers. They are also known as porcupine provision. Here takeovers are repelled by adding clauses and amendments in the charter of the firm such that if any company tries to take over such clauses are activated and prevent the takeover by making the takeover un favourable due to higher take over cost. It includes poison pills.
3. Poison Pills
This is one the strongest strategy used by the target firm to deter the offers made by acquisitioning firm. As the name shows poison pills cannot be swallowed easily. In order to avoid acquisition, target firm keep such pills in their capital structure that triggers only when a firm tries to take over the other. Upon such trigger, these pills react in such a way that it increases the cost of capital of target firm to make it undesirable for the acquirer and turning it into a matter of loss instead of profit. Like a target firm can take loan from financial institution and create a clause that upon acquisition, the acquirer firm has to pay back the loan to financial institution immediately. This increases the overall cost for the acquiring firm and makes it unfavourable for them. Poison pills are also triggered through issuance of more shares.
In ‘flip in poison pills’ shares of the target firm are issued in such a way that they are sold at discount, first offer is given to existing shareholder as their pre-emptive right. By doing so shares already purchased by the acquirer dilutes in their value and the acquisition becomes unfavourable for that firm.
In ‘flip over poison pills’ shareholders of the target firm are granted with the shares of the acquiring firm. Such clauses dilute the acquisition offer unfavourable and un acceptable for the shareholders of the acquirer.
4. Golden Parachutes
The objective of golden parachutes is to hire and retain highly qualified professional as top managers and executives. A clause is included in the charter of the firm that upon termination of the manager he would be paid with large severance either in form of stock options or monetarily. Such a clause increases the cost for acquisition as upon takeover the management may be replaced and that would cost high to acquiring firm. These are used to avoid such takeovers.
5. Green Mails
Essence of green mail is similar to black mail. In this the acquiring company buys the majority shares of the target firm and then give them the offer to buy their own shares at premium from acquirer otherwise they would take over the firm. In order to avoid takeover. The target firm purchases back its own shares at inflated price. This result in profit of the acquiring firm. Sometimes target firm assumes that it is only the strategy to earn profit without any intention of takeover and do not give much consideration to it resulting into takeover. E.g. Carl Icahn bought shares of Saxon industry at $7.5 per share to acquire 9.9% stake in Saxon industry. In reaction the company was threatened that the investor might have intentions to take over Saxon industry hence the company bought back its shares from the investor at $10.5 per share. This was a profit to the investor.
6. Pac man Defense
It is strategy used by the target firm to defend itself against the hostile attempts of the acquirer. The company uses the concept of the Pac man game which involves counter attack on enemies. Here the target firm comes up with the strategy to defend itself by counter takeover of the acquiring firm. The target firm sell off its certain asset or take loan to buy the majority shares of the acquiring firm. This is done to defend itself from takeover. But in longer run the strategy is a burden on shareholders’ value as to implement it company has to sell off its assets, some business units or take debt which makes it very expensive. For example, in 1982 takeover attempt was made by Bendix Corporation to take over Martin Marietta, a heavy building firm by buying its more than 70% shares whereas to defend itself Martin Marietta bought 50% of the shares of the Bendix Corporation by selling off its multiple noncore business units and took debt. The takeover war ended between the two companies by heavily damaging the shareholders’ value and costing the companies a huge amount.
7. Black Knight and White Knight
Black knights are hostile companies that tend to take over the other company. Whereas white night is a friendly company that comes in between the acquirer and target firm to save target firm from hostile takeover. Here the white knight itself buys the majority shares of the target firm but do not take over its operational control. This decision is only taken to save the target firm and is a friendly arrangement between the white knight and target firm. For instance, in 2016 Gannett Co made a bid of $820 million to buy Tribune Publishing Co. The target company fell that their share price was undervalued and hence turned down the offer. Whereas Gannett Co pursued for proxy fights to take over the company. During this process an investor Patrick Soon-Shiong came in between the two firms as saviour for target firm and invested $70.5 million to become the second largest shareholder and prevent takeover.
8. Classified Shares
This is another way to avoid takeovers by classifying the common stock into two categories on basis of voting rights and dividends. Class A shareholders have right to dividend but they do not possess voting rights whereas Class B has voting rights but there is no preference is given to dividends. These class B shares are known as founding shares and retains decision making capability.
9. Employee Stock Ownership Plan
In this strategy, company issues stock to its employees as part of their remuneration package. By doing so company achieves two objectives, first alignment of shareholders’ interest with that of employees and the other to avoid hostile takeovers as employees would become the shareholder and will favour the decision of the management. If any employee leaves the company or gets fired, he can only take the cash payment with him not the ownership of stocks.
9. Recapitalization or Corporate Restructuring
In this strategy, the target firm introduces changes in its capital structure either by issuing more debt, by issuing more equity which dilutes the earning per share and announcement of dividend payment. Each of the following is done to increase the cost of capital in order to increase the takeover cost and making this decision unfavourable for the acquirer.
10. Selling Jewels of Crown
This strategy involves the selling off the most valuable assets of the target firm for which the acquirer has placed the bid. By doing so the target firm makes itself less attractive towards acquirer in order to avoid acquisition. Such selling decreases the market share of the target firm, a decline in sales and drop in shares’ price rendering it to be less profitable.
Impact of Acquisitions on Financial Performance of Companies
Many research studies have shown that acquisitions do not have a substantial positive impact on the acquiring company. Usually the profitability and solvency ratios remain the same whereas this has been observed that post mergers the operational performance of the company declines as acquisitions and mergers do not only involve financial aspects, culture and emotional differences between the two companies make it hard for them to work together in efficient manner.
March 25, 2019