Acquisition/ UNIT: 5

Takeovers
ACQUISITION/
TAKEOVERS

An acquisition is
when one company
purchases most or all
of another company's
shares to gain control
of that company
 1. To realize operational efficiencies
and economies of scale

2. To eliminate competition

REASONS
FOR 3. To acquire a company in a unique
niche market
TAKEOVERS

4. Empire building by management

 FRIENDLY HOSTILE BAILOUT
TAKEOVER TAKEOVERS TAKEOVER
TYPES OF
ACQUISITION/
TAKEOVERS

REVERSE BACKFLIP
TAKEOVERS TAKEOVERS
 FRIENDLY TAKEOVER
 In a friendly takeover, the acquirer will
purchase the controlling shares after thorough
negotiations and agreement with the seller.
The consideration is decided by having
friendly negotiations. The takeover bid is
finalized with the consent of majority
shareholders of the target company. This form
of purchase is also called as “consent
takeover”.
Friendly Takeover Strategies

OFFERING THEIR OWN OFFERING A SHARE

SHARES OR CASH PRICE PREMIUM
 Advantages of Friendly Takeover
 In this takeover, both acquirer and target company take part in designing the
structure of the deal to their mutual satisfaction.
 In this takeover, the target company doesn’t have to face or experience any
annoying disputes or loses that may occur because of other types of takeovers as in
the case of a Hostile takeover.
 Generally better price per share is another advantage of a friendly takeover.
 The involvement of both parties (bidder and target company) ensures better design
of the deal and value delivery to the participating parties.
 The target company does not incur costs or erase its value due to employing
defence mechanisms to prevent a hostile takeover.
 The bidder incurs reasonable costs to acquire the target company. The per share
premium is primarily based on the growth prospects of the target company and
potential synergies created as a result of a deal.
HOSTILE TAKEOVERS
A hostile takeover occurs
when one corporation, the
acquiring corporation,
attempts to take over
another corporation, the
target corporation, without
the agreement of the target
corporation’s board of
directors
 Tender offer: A tender offer is a direct offer
to shareholders to purchase their shares at a
premium to the current market price of the
stock.

Hostile
Takeover Proxy fight: A proxy fight is where the
acquirer company persuades shareholders
Strategies of the target company to band together
and vote out the board of directors, and
then subsequently approve the takeover.
 Advantages to the acquirer company – Hostile
Takeover

The acquirer is benefited by way of reduction in procurement costs and

operational synergies resulting in improved margins.
The acquirer can acquire new technology and add to its manufacturing
capacities.
The acquirer is able to increase its market share and acquire new
brands
 These forms of takeover are resorted to
bailout the sick companies to allow the
BAILOUT company for rehabilitation as per the
TAKEOVER schemes approved by the financial
institutions. The lead financial
institutions will evaluate the bids
received for acquisitions, the financial
position and track record of the
acquirer.
 A "reverse takeover" is a type of
takeover where a private company
acquires a public company. This is
usually done at the instigation of the
REVERSE larger, private company, the purpose
TAKEOVERS being for the private company to
effectively float itself while avoiding
some of the expense and time involved
in a conventional IPO.
 A "backflip takeover" is any sort of
takeover in which the acquiring
company turns itself into a subsidiary of
BACKFLIP the purchased company. This type of
TAKEOVERS takeover can occur when a larger but
less well-known company purchases a
struggling company with a very well-
known brand.
 ADVANTAGES OF TAKEOVER
 Increase in sales/revenues (e.g. Procter & Gamble takeover of Gillette)
 Venture into new businesses and markets
 Profitability of target company
 Increase market share
 Decreased competition (from the perspective of the acquiring company)
 Reduction of overcapacity in the industry
 Enlarge brand portfolio (e.g. L'Oréal's takeover of Body Shop)
 Increase in economies of scale
 Increased efficiency as a result of corporate synergies/redundancies (jobs with
overlapping responsibilities can be eliminated, decreasing operating costs)
 Expand strategic distribution network
 DISADVANTAGES OF TAKEOVER
 Goodwill, often paid in excess for the acquisition
 Culture clashes within the two companies causes employees
to be less efficient or despondent
 Reduced competition and choice for consumers in oligopoly
markets (Bad for consumers, although this is good for the
companies involved in the takeover)
 Likelihood of job cuts
 Cultural integration/conflict with new management
 Hidden liabilities of target entity
 The monetary cost to the company
 Lack of motivation for employees in the company being
bought.
 Takeover defence includes all actions by managers to
resist having their firms acquired. Take over defence are
also called anti- takeover tactics. Takeover defences are
broadly classified into two.

Pre- Bid / Preventive Takeover Defences: These are put in

place in advances of any specific takeover bid. They are
TAKE OVER installed so that a bidder will not attempt a takeover.
STRATEGIES/
DEFENCE
MEASURES Post Bid / Active Takeover Defence: These are deployed in
the midst of a takeover battle where a bidder has made
an offer for the company.
 Pre- Bid / Preventive Takeover Defences Measures

1. Shark Repellent
 A shark repellent is a strategy taken by public companies to ward
off unwanted takeovers. It is a generic term for periodic or
continuous measures taken by the management of a firm to
discourage unwanted or hostile takeovers.
 The measures may be periodic or continues efforts exerted by
management to make special amendments to its bylaws. The
bylaws become active when a takeover attempt is made public to
the company’s management and shareholders. It fends off
unwanted takeover attempts by making the target less attractive to
the shareholders of the acquiring firm, hence preventing them from
proceeding with the hostile takeover
 A golden parachute consists of substantial benefits
given to top executives if the company is taken
over by another firm, and the executives are
terminated as a result of the merger or takeover.
Golden In other words, golden parachute is a clause in the
Parachute employment contract, generally of top key
executives, that employee will receive certain
significant benefits as an inducement for early
employment termination from the company due to
a takeover.
White mail:

Whitemail is a strategy that a takeover target

can use to try to thwart a hostile takeover
attempt. Whitemail involves the target firm
issuing a large number of shares at below-
market prices, which are then sold to a friendly
third party. This helps the target avoid the
takeover by increasing the number of shares
the acquirer must purchase in order to gain
control, thus increasing the price of the
takeover. It also dilutes the shares.
 A staggered board is a board made up of
different classes of directors that serve
different term lengths and are elected at
different times of the year. A staggered board
is an effective defence against a hostile
Staggered takeover due to the staggered style of the
Board of elections. A staggered board, also known as
Directors: a classified board, is comprised of directors
placed into different classes. They play an
important role in the modern corporate
landscape by preventing takeover by a hostile
bidder.
  Super-majority amendment is a defensive tactic
requiring that a substantial majority, usually 67% and
sometimes as much as 90%, of the voting interest of
outstanding capital stock to approve a merger. This
amendment makes a hostile takeover much more difficult
Super to perform. In most existing cases, however, the
supermajority provisions have a board-out clause that
Majority provides the board with the power to determine when and
if the supermajority provisions will be in effect. Pure
supermajority provisions would seriously limit
management's flexibility in takeover negotiations.
 Crown Jewels

 The Crown Jewel defence Strategy is when the target company of a hostile
takeover sells its most valuable assets to reduce its attractiveness to the hostile
bidder. It is last resort defence since the target company will be intentionally
destroying part of its value, with the hope that the acquirer drops its hostile
bid. This is a contract to sell the firms valuable assets at below market price if
the hostile bid succeeds. It is based on the agreement that a particular asset of
the firm is so highly valued that it attracts raider. The asset may be a highly
profitable division, an undervalued fixed asset or an intangible asset like brand
or patent. When a target company uses the tactic of divesture it is said to sell
the crown jewels.
 Poison Pill

A poison pill is a tactic utilized by companies to

prevent or discourage hostile takeovers. A
company targeted for a takeover uses a poison
pill strategy to make shares of the company’s
stock look unattractive or less desirable to the
acquiring firm. A poison pill is a type of defence
tactic utilized by a target company to prevent or
discourage attempts of a hostile takeover by an
acquirer.
 There are two types of poison pills:

1. A “flip-in” permits shareholders, except for the acquirer, to purchase

additional shares at a discount. This provides investors with instantaneous
profits. Using this type of poison pill also dilutes shares held by the
acquiring company, making the takeover attempt more expensive and
more difficult.
2. A “flip-over” enables stockholders to purchase the acquirer’s shares
after the merger at a discounted rate. For example, a shareholder may gain
the right to buy the stock of its acquirer, in subsequent mergers, at a two-
for-one rate.
 Post Bid / Active Takeover Defence
1. Pac Man Defense

The Pac-Man defense is a defensive business

strategy used to stave off a hostile takeover, in
which a company that is threatened with a hostile
takeover "turns the tables" by attempting to
acquire its would-be buyer. This strategy aims at
the target company making a counter bid or tender
offer for the raiders company or acquiring
company. This would force the raider to defense
himself and consequently call off his raid.
 Greenmail or greenmailing is the action of
purchasing enough shares in a firm to challenge a
firm's leadership with the threat of a hostile
takeover to force the target company to buy the
purchased shares back at a premium in order to
Greenmail prevent the potential takeover.
Greenmail is the practice of buying enough shares in
a company to threaten a hostile takeover so that the
target company will instead repurchase its shares at
a premium.
It occurs when the target firm reaches
a contractual agreement with the
potential bidder that he will not
increase his holdings in the target firm
for a particular period. The agreement
can take many forms, including the Standstill
right first refusal to the target firm if Agreement
the bidder sells his shares and a
commitment by the bidder not to
increase his holdings beyond a certain
percentage in return for a fee. Stand
still agreements are frequently
accompanied by greenmail.
Litigation Most effective as a delay tactic, a
target can use the court system to
contend that a takeover would
materially harm the competitive
structure of the industry.
Bringing administrative claims or
court proceedings against the
raider is regarded as one of the
most common anti-takeover
measure.
 White Knight
A white knight is a hostile takeover defence whereby a
'friendly' individual or company that acquires a corporation
at fair consideration that is on the verge of being taken over
by an 'unfriendly' bidder or acquirer, who is known as the
black knight.
The White Knight may make an offer to buy all or part of the
target firm on more favourable terms than the original bidder
and promise not to disassemble the firm or lay-off the
management or other employees. It may be difficult to find a
bidder willing to agree to such restrictive terms and some
compromise by the target firm may have to be entertained.
 People Pill
A people pill is a defensive strategy to ward off a hostile
takeover. The target company's management team threatens
that, in the event of a takeover, the entire team will resign.
The purpose of a people pill is to discourage the acquiring
company from completing the takeover, by introducing the
possibility of having to put together an entirely new
management team. This strategy is only effective if the
acquiring company wants to keep the existing management.
 Combination and Competition
Act 2002

Competition Commission of
LEGAL India (CCI)
ASPECTS
OF M & A
SEBI Takeover Code