Hostile Takeovers: Defence and Takeover Strategies

All this looks fine, but is it always? If an unlisted company decides not to sell its business to the buyer company, the buyers do not have many options. Is it possible in the case of listed companies as well, or just buying most shares will make it possible? Does the original management have a say? Let us find out.

Hostile Takeover

When management of the target company does not approve the takeover, and if the buyer still goes to acquire it, it is called as 'Hostile Takeover.' While the buyer has its own ways to a hostile takeover, target too has devised certain defences.

The takeover may be blocked for several reasons. One of the reasons may be that the target management does not think it is in the best interest of the company. It might be associated with a mismatch in asking price and bidding price. There may be administrative issues. Brand dilution is also a problem.

Some cases are interesting. As folklores say, Ford could not buy Ferrari just because Ford put forth the condition that Ferrari Racing Team would not participate in the races where Ford’s Racing Team would compete. Ferrari refused the offer. It was later acquired by Fiat.

The Corporate Structure

A corporate company listed on a stock exchange is liable to its shareholders. Therefore, it has a board of directors. This board is the eyes and ears of shareholders, and they see if the decisions are made in the interest of all shareholders rather than just promoters of the enterprise.

Shareholders elect some of these directors. Of course, the large shareholders, like promoters of the company, will have a significant influence on the selection of this management. Undoubtedly, except for some independent directors, the other directors are either promoters themselves or someone on behalf of them.

The Strategies

One way the buyer may buy the target company, is by buying many shares from the stock market. The buyer puts forth a public offer; hence, this strategy is called 'tender offer.' Say, the share price of the target company is ₹100. The buyer will offer ₹125 for this share.

If the holding of the buyer exceeds 50%, there is no defence left for the target. Even if the target challenges the takeover, the buyer may approach the court. It takes less time to fructify, and the buyer may acquire the target soon. The only disadvantage is that it is costly. In addition, it is tough to lure all big shareholders and own a majority of shareholders in favour.

If the buyer is unwilling to spend so much money, it rather plans to engage in the 'proxy fight.' The buyer would ask (read bribe) its existing shareholders to vote out some or all of its senior management. When the buyer has enough shares, it can change the management in the board, and have his stooge who would approve this takeover.

The Defences

A simple way is that the target may buy back its shares from existing shareholders. In that way, it can strengthen its holding.

Another way is the 'shareholders rights plan' that allows the company to protect shareholders in case of a hostile takeover. In this case, the company issues new shares to existing shareholders (except to the buyer company) at a very low rate, ultimately disturbing share dynamics.

The company may have a 'Shark Repellent' charter that binds supermajority (say 75%) vote to approve any merger or acquisition.

In fact, the management of the target may threaten a 'poison pill.' It means that entire management would resign as a protest. The buyer would lose the key personnel he needs to keep the target running. Buying the company is a different thing, but running the company will become unviable without them.

There is a 'Staggered Board' defence. Say there are seven directors and only one director is replaced in a year as per company charter. In this case, the buyer will have to wait at least four years to have its say (get 50% director of his own) and seven long years to get the entire management of his own.

Similar to it is 'Golden Parachute', where the company promises management a handsome fortune if their termination is triggered by hostile acquisition. This becomes financially unviable for the buyer company.

Some ways come at their own cost. The target may choose to take a lot of debt. The acquirer might not want to buy a company where he has to repay this debt. This is called as ‘scorched earth’ mechanism.

The company may also sell its most attractive businesses to other conglomerates. In this case, the buyer company now has much less incentive to fight. It is known as 'Crown Jewel' defence.

The fight may get ugly. Say if A wanted to buy B. Instead, B comes up with a tender offer for A. It tries to buy the shares of A, and threaten it back. This is called as 'Pac-man Defence,' named after the vintage videogame. Another strategic move may be to sell the company but retain the control (White Knight). In fact, Paramount Pictures (producers of the classic 'The Godfather') sold to Time Inc. in a similar way.

Another one is to sell some part of the business a friendly enterprise, than this hostile takeover (White Squire). There are polite ways, as well. Target may request to buy its own shares from the buyer company at a higher price. This proposal is called 'Greenmail.' They may sign a 'standstill agreement' to prevent any acquisition for some time. One way might be to 'Just Say No.'

Winding Down

Mergers and Acquisitions bring out the most interesting stories. That is where one would see the entire corporate action coming to the table. The hostile takeovers and their defences are even more exciting. Philosophically, companies are just like humans. They start, grow, mature, and someday acquired or merged, and then cease to exist. Though today some may win, someday some other would.