Defense mechanism against

takeovers:


 ROMAN ALI KHAN

 Roll. No.260367
 Defense mechanism against
hostile takeovers:
The classic ‘poison pill strategy’ (the
shareholders’ rights plan) is the most
popular and effective defense to combat
the hostile takeovers. Under this method
the target company gives existing
shareholders the right to buy stock at a
price lower than the prevailing market
price if a hostile acquirer purchases
more than a predetermined amount of
the target company’s stock.
The purpose of this move is to devalue
the stock worth of the target company
and dilute the percentage of the target
company equity owned by the hostile
acquirer to an extent that makes any
 ‘White Knight’ is another type of defense
mechanism. In this case, a third company
makes a friendly takeover offer to the
company facing a hostile takeover. This is a
common tactics in which the target
company finds another company to enter
the scene and purchase them out and away
from the company making the hostile bid.
The several reasons why the companies
prefer to be bought out by the third
company could be -- better purchase terms,
a better relationship or better prospects for
long-term success. At times these ‘white
knight’ companies only help the target
company improve the deal terms with the
hostile bidder. A very good example is of
Severstal which acted as a ‘white knight’ in
the Arcelor-Mittal deal, and causing a 52.5
Pac-Man Defense – wherein a target
company thwarts a takeover bid by
buying stocks in the acquiring
company, then taking the bidder
company over.
Staggered Board:-It is used generally

in combination with ‘Shareholder’s

Rights’ plan and is considered most
effective. This method drags out the
takeover process by preventing the
entire board from being replaced at the
same time. The directors are grouped
into classes, each group stands for the
election at each annual general
meeting. It prevents entire board from
Golden Parachute is a tactics which


works in the manner that it makes

the acquisition more expensive and
less attractive. It is provision in a
CEO's contract, which is worded such
that the CEO gets a large bonus in
cash or stock if the company is
acquired.

Shares with differential voting


rights are shares which ‘carry’ more

votes than ordinary shares. They
have been allowed in India since
2001 and can be used to thwart
hostile takeovers since, for all
practical purposes, they decouple
economic interest and voting rights.



 Indian auto major Tata Motors announced a Rs
4,200 crore rights issue to part-fund its $3 billion
acquisition of the UK-based high-end auto brands
– Jaguar and Land Rover (JLR).
 Structuring the rights offer in a unique
manner, the Tata Motors management offered
two unlinked offers in the ratio of one share for
six shares held. The first part was a regular rights
issue which was priced at Rs 350 and raised Rs
2,186 crore. The other part, termed ‘A’ ordinary
shares, had a differential voting rights and also
attracted differential dividend, and fetched Rs
1,961 crore for the company.
 The ‘A’ ordinary or differential voting shares
were issued at Rs 305, a discount of 12.8% to the
regular rights shares and also gave a 5% extra
dividend, over the regular voting rights shares.
