A hostile takeover is the forceful acquisition of one company by another. Such a takeover does not happen with the consent of the target company. The target company opposes a hostile takeover through various defense strategies.
There are various hostile takeover defense strategies which are divided into two parts:
- Pre-offer Takeover Defense Strategies
- Post-Offer Takeover Defence Mechanism
- Pre-offer hostile takeover defense strategies
- Post-offer hostile takeover defense strategies
Let’s learn about these strategies in detail:
Pre-offer Takeover Defense Strategies
Following are the types of pre-offer hostile takeover defense strategies:
Under the poison pill, the target company gives its shareholders the right to buy the target company’s stocks at a large discount compared to the stock’s market price.
Under poison put, the target company gives its bondholders the right to sell the bonds back to the company at a pre-determined redemption price, which is generally above or at the par value.
Restrictive Takeover Laws
The companies can incorporate themselves in the states where the law helps them defend against hostile takeovers.
Under the staggered board strategy, the target company’s board of directors is divided into three groups of equal sizes. Each group can be elected in a staggered way for the three-year term. This arrangement will deter an acquirer as he can win only one-third of the directors in a year.
Restricted Voting Rights
Under the restricted voting rights measure, shareholders who have recently acquired a large percentage of stocks are restricted from voting.
Supermajority Voting Provisions
Through the supermajority provision, a higher majority, say 85%, of the shareholders need to approve the transaction instead of the standard 51%.
Fair Price Amendments
Through fair price amendments, the target company does not allow mergers where an offer is below a threshold value.
Under the golden parachute, compensation arrangements are made between the target and its senior management. The managers have the right to leave the company with huge exit payouts if there is any change in the corporate control.
Scorched Earth Policy
In the scorched earth policy, the target company spoils its own image to protect itself from a hostile takeover.
Post-Offer Takeover Defence Mechanism
These are the following types of post-offer hostile takeover defense strategies:
‘Just Say No’ Defence
The ‘just say no’ defense is the easiest way to decline the offer. Suppose the acquiring company tries the bear hug or even a tender offer. In that case, the target company’s management should explain to its shareholders and the board of directors why the deal is not the best for the company.
The management can allege the violation of securities law and file a court case against the acquirer.
In the greenmail strategy, the target company makes an agreement with the acquirer to buy back its own shares from the acquirer at a premium. This is mostly accompanied by another clause prohibiting the acquirer from making another attempt for a specific time period.
The target company can acquire its stocks from any shareholders by using a share repurchase. This can lead to an increase in the cost for the acquirer.
The target company uses a huge amount of debt to finance the share repurchases. However, they do not repurchase all the shares. Such debt makes the company look riskier and less attractive for a takeover.
‘Crown Jewel’ Defense
Under the ‘crown jewel’ defense, the target company’s management identifies the major motivation behind the deal, i.e., a specific subsidiary or an asset, and sells it off to another party with a promise to buy it back after the acquiring company drops its bid.
Under the ‘Pac-man’ defense, the target company can make a counter-offer to take over the acquiring company and defend itself. However, the target company cannot use other defensive measures later if it decides to use this strategy.
White Knight Defense
The board of the target company looks for a third party that has a better fit with the company to buy the target company in place of the hostile acquirer. This third party is the ‘White Knight‘, which offers better prices for the shares of the company in comparison to the hostile acquirer. Such a friendly takeover helps in avoiding a hostile takeover.
White Squire Defense
The board of the target company asks a third party to buy a substantial but a minority stake in the target company. This stake would be enough to obstruct the takeover with no need to sell the company. This is white squire defense.
Above are the mentioned various hostile takeover defense strategies. Generally, the pre-offer defense strategies are a major recommendation. The target company uses pre-offer defense strategies to become less attractive for a takeover. While the post-offer defense strategies are used after the target company receives a bid for a takeover.