In
the earlier article we had discussed about the takeover and different types of
takeover. Today in this article let us see what does hostile takeover means and
the strategies to avoid hostile takeovers or defensive measures of hostile
takeover.
Hostile Takeover:
It is also known as “Violent
Takeover”. In this takeover the firm or
individual gains control over a company by purchasing the required number of
shares(minimum 51%) from non-controlling shareholders in open market.
Thus usually the target company
whenever finds that the raider is trying to buy the company it makes it
unattractive so that the raider defense himself as a result of which raider
calls of the raid i.e. decides not to purchase the target company. The
different kinds of defensive measures are,
§ Poison Pills
§ Poison Put
§ Greenmail
§ Pac Man defense
§ White knight
§ White Squire defense
§ Golden Parachutes
§ Crown jewels lock up
§ Asset restructuring
§ Standstill Agreement
§ Shark Repellants
Now let us try to understand each of the defensive measures to
avoid hostile takeover.
§ Poison Pills
Poison
Pills refer to securities which are issued by the target firm in the form of
the rights offering which allow the holders to buy stock in the acquiring at a
low price.
§ Poison Put
Target
Put is a defensive strategy where the target company issues bonds that
encourage holders to cash at the higher prices as a result cash drainage the
target firm becomes unattractive.
§ Greenmail
Greenmail
is the defensive strategy where the target firm repurchases the shares cornered
by the raider. The profit will be made by raider after similar to blackmail and
this would keep the raider at a distance from the Target Company or firm.
§ Pac Man defense
In Pac Man
defense strategy the target firm or company aims at counter bid for the raiders
company which will result the raider to defend himself and consequently call
off this raid on Target Company.
§ White knight
White Knight is
a defensive strategy where a company comes to rescue a firm or company that is
targeted for a takeover. In the White knight strategy the buying firm or
company makes an offer to all or a part of the target firm on favorable terms
and conditions than the original bidder and also promises not to disassemble
the company or firm and lay-off the company’s top management or employees. It
is difficult for the target firm to find a bidder who is favorable to the
target company but somewhere target firm has to compromise even it finds a
bidder. Generally the white knight strategy is adopted immediately after the
bid is launched.
§ White Squire defense
White Squire
defense strategy is a strategy where two parties or companies come together and
implement a strategy to preserve the target firm’s independence. In this
strategy the target firm places or sells the assets or shares with the friendly
firm or investor who is not interested in gaining the control of the target
firm and will not sells the assets or shares of the target firm to the hostile
bidder or raider. This strategy is rarely adopted since the white squire may
become gray knight i.e. makes hostile bidder himself. This strategy is similar
to the White Knight.
§ Golden Parachutes
Crown
Parachute is a strategy where the management has to be paid a very high
compensation package if they are forced to leave the firm. In this strategy, manager if forced to leave firm or company forcefully then five to ten years
contract with a provision of full payment upfront is made. Thus as a result of
this it forces the raider to call off his raid
§ Crown Jewels Lock Up
Crown
jewel is a defensive strategy where target firm sells of the valuable assets
below the market price when the raider succeeds in hostile bid.
§ Asset Restructuring
Asset
Restructuring is a defensive strategy where the target company sells of the
assets due to which the raider is acquiring or the assets required by the
raider. Thus this action of the target firm or company makes his less
unattractive to the raider.
§ Standstill Agreement
Standstill is a
defensive strategy where the target firm or company enters contractual
agreement with the potential raider to not to increase the holdings in that
target firm or company for a specific time. This kind of agreement may take
various forms like the raider commits not to increase his holding beyond a
certain limit for a certain percentage of the fee. Usually standstill strategy
is followed by the Greenmail strategy.
§ Shark Repellants
Shark Repellent is a defensive
strategy where the target firm becomes unpleasant that it becomes attack proof.
In this strategy for a merger or takeover it requires approval 80% of the
shareholders or BOD, fair price provision to determine the price of the
minority shareholders, stocks and dual capitalization thus this result in two
classes with different voting rights in equity.
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