Hostile Takeovers and Defense Strategy

Submitted by: Mansi Dhawan (051) Neha Goel (061) Hardeepika Singh Ahluwalia(064)

Scope
Meaning of Acquisition, takeover

Defense strategy Crown Jewel Shark repellant Pacman Defense Greenmail defense Scorched earth Golden parachute white Knight Grey Knight Poisson pill People pill Poison put

ACQUISITIONS
The acquisition of one company (called the target company) by another (called the acquirer)

Accomplished not by coming to an agreement with the target company's management, but by going directly to the company's shareholders or fighting to replace management in order to get the acquisition approved

TAKEOVERS
Takeovers are motivated by excessive greed, A takeover is a market rout for acquisition of company,

The takeover rout is adopted when the target company oppose the merger,
Control in target company is acquired by purchasing company through purchase shares from market by making a bid, In this way SEBI role becomes very important.

Acquisitions
Before a bidder makes an offer for another company, It is informed to the company's board of directors and takes place in their knowledge If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders. It is characterized by bargaining until agreement is signed

Hostile takeovers
A hostile takeover allows a suitor to bypass a target company's management unwilling to agree to a merger or takeover

A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it
The bidder makes the offer without informing the target company's board beforehand, A hostile takeover can be conducted in following ways: A tender offer, Bear Hug, Proxy Contest.

Crown Jewel
It is a strategy wherein a company facing a threat of takeover sells off its most attractive assets to a third friendly party or spins off its valuable assets in a separate entity Makes the target company less attractive for the company planning a takeover, which then loses interest and defers the takeover bid.

Selling the crown jewel

It represents the most valuable unit or department of a company

It is categorized as crown jewel based on their profitability, value of assets owned and future growth prospects Target company makes anti-takeover clauses, whereby the company gets the right to sell off the crown jewels if a hostile takeover occurs

SHARK REPELLENT/PORCUPINE DEFENCE

Shark repellant is a repellant applied by deep sea drivers to prevent sharks from attacking them. The target company makes special amendments to its bylaws that become active only when a takeover attempt is announced

Objective of the special amendments is to make the takeover loss attractive to the acquirer

SHARK REPELLENT/PORCUPINE DEFENCE

In such a case, the acquirer is termed as the shark and the proposed amendments are repellents that prevent the shark from attacking This method may not always be in the interest of the shareholders as may adversely affect the financial health of the company Strategies adopted include the shark repellent: Poison pills Scorched earth policy Golden parachutes

Pacman defense
Defensive tactic used by targeted firm in a hostile takeover situation. The targeted firm turns around and tries to acquire the other company that has made hostile takeover attempt.
Acquiring firm A Acquisition (Hostile takeover)
Pacman defense

Target firm B

Acquiring firm A

Target firm B

Martin Marietta Corporation and Bendix Corporation(1982)

Martin Marietta corporation: American company founded in 1961 and deals with chemicals, aerospace and electronics. Listed on New York stock exchange (NYSE)

Pacman defense (1982)

Acquiring firm Bendix corporation
Hostile takeover

Target firm Martin Marietta corp.

Pacman Defense

Sold out non core business and used cash that it generated to acquire Bendix. Borrowed $1 billion

Greenmail defense strategy

The money that is paid by the target company to another company, known as a corporate raider, that has purchased a majority of the target company's stock.

The greenmail payment is made in an attempt to stop the takeover bid. The target company is forced to repurchase the stock at a substantial premium (the greenmail payment) to prevent the takeover. This is also known as a "bon voyage bonus.
Acquiring firm A (corporate raider) Target firm B

Target company pays a premium to purchase its own shares back ( at inflated price) from corporate raider.

Regis paper co. and Sir James Goldsmith

The St. Regis Paper Company provides an example of greenmail. When an investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the paper concern, the company agreed to repurchase the shares at a premium. Goldsmith's group acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its stake at $52 per share

Scorched earth strategy

An anti takeover measure in which a company sells many or all of its "good" or desirable assets and/or issues an extraordinary amount of debt.

A scorched earth policy is designed to make the company less attractive to potential acquirers.
Therefore it is a reaction to a takeover attempt that involves liquidating valuable assets and assuming liabilities in an effort to make the proposed takeover unattractive to the acquiring company.

GOLDEN PARACHUTE
Intended to help executives resist takeover attempts that endanger their jobs by aligning their wealth more closely with the shareholders interests Could potentially help stagger and make a hostile takeover more expensive, though only to a certain degree Example : payment of $ 23.5 million to the six officers of Beatrice companies in connection with its leveraged buyout in 1985.

WHITE KNIGHT
The targeted firm seeks for a friendly firm which can acquire a majority stake in the company and is therefore called a white knight Can be chosen for several reasons such as; friendly intentions, belief of better fit, belief of better synergies, belief of not dismissing employees or historical good relationships. The most common outcome of a white knight strategy would be that targeted firm eventually gets overtaken by the white knight.

WHITE KNIGHT (contd.)

Example : Reliance, when Reliance wanted to takeover Rassi Cements Rassi called on Indian Cements as a white knight and offered it a stake. But, later, the white knight became a predator when Indian Cements took over Rassi Cements through an open public offer.

GREY KNIGHT
A 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).
Example: Search engine Google and AOL appeared as white knights to help Yahoo brush up Microsoft as it was threatened to go ahead with the hostile takeover. Rupert Mordoch led New Corps acted as a grey knight as it was also interested in Yahoo.