A strategy used by corporations to
discourage hostile takeovers. With a poison
pill, the target company attempts to make its
stock less attractive to the acquirer. There
are two types of poison pills-
A µ¶flip-in¶¶ allows existing shareholders (except the
acquirer) to buy more shares in the target company at
a discount, upon the mere accumulation of a specified
percentage of stock by a potential acquirer. By
purchasing the shares cheaply, investors get instant
profits and, more importantly dilute the shares held by
the competitors. As a result, the competitor¶s takeover
attempt is made more difficult and expensive.
Internet major Yahoo! adopted this form of poison pill
in 2000 allowing the board to issue upto 10 million
shares on new stock in the event of an acquisition
offer on the table that they did not want to endorse
(like that of Microsoft) and each share cane have
nearly unlimited voting power. This defense made it
practically impossible for Microsoft to proceed with a
hostile bid after Yahoo! expressed its unwillingness
towards Microsoft¶s offer for Yahoo! and ultimately
resulted in the withdrawal of the same.
A µ¶flip-over¶¶ allows stockholders to buy the acquirer¶s
shares at a discounted price after the merger. The
holders of common stock of a company receive one
right for each share held, bearing a set expiration date
and no voting power. In the event of an unwelcome
bid, the rights begin trading separately from the
shares. If the bid is successful, all shareholders except
the acquirer can exercise the right to purchase shares
of the merged entity at discount. For instance, the
shareholders have the right to purchase stock of the
acquirer on a 2-for-1 basis in any subsequent merger.
The significant dilution in the shareholdings of the
acquirer makes the takeover expensive and
sometimes frustrates it. If the takeover bid is
abandoned, the company might redeem the rights.
The obvious benefit of a poison pill is that it
offers the target company enviable options even
in the critical situation of a coercive takeover:
a) The first option, allows the target to
successfully ward off an unwelcome bid.
b) As for the second option, in case the target
company is considering going ahead with the
deal, it makes the raider negotiate and buys time
for the target company to get a proper
evaluation of the offer and thereby maximizes
the takeover premium, in the best interest of the
shareholders of the target company.
a) Ignores merits of takeover
Firstly, these defenses tend to block all hostile
takeovers without weighing out its merits. An
unsolicited bid may sometimes cause the stock prices
to shoot up and may have vast potential to increase
shareholder wealth. Also, it may offer an attractive
takeover premium which the shareholders might be
interested in. A case in point is the Microsoft¶s offer of
a 62 percent premium to acquire internet giant, Yahoo!
in February 2008 which was turned down by the
Yahoo! Board and the Board¶s decision was met with
heavy criticism for having acted irresponsibly, followed
by a spate of lawsuits alleging undermining of
shareholder interests and a shareholder revolt led by
billionaire investors like Carl Icahn.
b) Shield to Inefficient management
Secondly, as was seen in Japan and U.S.A.,
poison pills tend to shield managers of dismally
performing companies from the pressures of the
stock market as well as from the µthreat¶ posed
to its incumbent management by a better offer.
Sometimes, such threat of takeovers by
µoutsiders¶ is primarily in the best interest of the
shareholders but is against the vested interest of
the management of the target company which
failed to maximize shareholder wealth. This in
turn denies the shareholders the opportunity to
accept a welcome offer.
c) Step to improve company image:
Thirdly, with corporate governance becoming the order
of the day, companies have poison pills in order to
enhance their corporate governance ratings. The more
transparent and shareholder friendly the company
practices, the better the company image and hence
bigger the size of the company.
d) Blocking Foreign Investment:
Fourthly, in an era of economic
liberalization, economic growth is but a
function of foreign investment. Thus
adoption of extreme defense measures by
domestic companies creates the
impression of a closed marked, thereby
waning foreign interest in that country.
This is in itself is reason enough for
companies such as e-Access thriving in
developing nations to scrap their poison
pills and be open to takeover offers.
The world's second- largest soft-drink maker, Pepsi Co
has sued its bottler, the Pepsi Bottling Group (PBG), the
world's largest manufacturer, seller and distributor of
Pepsi-Cola beverages for its poison pill defense against
the soft drink makers' proposed acquisition.
Pepsi filed a lawsuit in Delaware yesterday against PGB
and certain board members for intentionally holding a
board meeting without giving notice to all the directors of
the PGB board and adopted a "poison pill," implemented
certain new executive compensation packages and
purported to amend the PBG bylaws in ways Pepsi
believes are detrimental to its rights as a shareholder.
Since Pepsi is a majority shareholder in PGB by
virtue of it's 33.1-per cent stockholding, it has
two directors on the board of PGB. Both these
directors were not informed about the board
meeting called by PGB last week.
In the suit, Pepsi alleges, ''PBG and its board
breached their fiduciary duties to PBG
shareholders by adopting a shareholder rights
plan, commonly referred to as a "poison pill,"
because it restricts Pepsi's rights as a PBG
shareholder and constitutes an unreasonable
and disproportionate response to Pepsi's
The suit seeks declaratory and injunctive relief.
The Pac-Man defense is a defensive option 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
A major example in U.S. corporate history is the
attempted hostile takeover of Martin Marietta by
Bendix Corporation in 1982. In response, Martin
Marietta started buying Bendix stock with the
aim of assuming control over the company. The
incident was labeled a "Pac-Man defense" in
How do companies use Pac-man
To employ the Pac-Man defense, a company will scare
off another company that had tried to acquire it by
purchasing large amounts of the acquiring company's
stock. By doing so, the defending company signals to the
acquiring company that it is resistant to a takeover and
will use the majority, if not all, of its assets to prevent the
acquisition. The resisting company may even sell off
non-vital assets to procure enough assets to buy out the
acquirer. Often, the acquiring company sees the
potential risk of being taken over as motivation to halt
The name refers to the star of a video
game Pac-Man, in which the hero is at first
chased around a maze by 4 ghosts - Inky,
Blinky, Clyde and Pinky. However, after
eating a "Power Pellet", he is able to
chase and devour said ghosts. The term
(though not the technique) was coined by
buyout guru Bruce Wasserstein.
In 1984, Securities Exchange Commission
commissioners said that the Pac-Man defense was
cause for ³serious concern,´ but balked at endorsing any
federal prohibition against the tactic. The commissioners
acknowledged a Pac-Man defense can benefit
shareholders under certain circumstances, but
emphasized that management, in resorting to this tactic,
must bear the burden of proving it isn¶t acting solely out
of its desire to stay in office. One concern is that the
money spent to gain control of the intruding company,
which includes payment for the services of lawyers and
other professionals needed to mount that defense,
represents substantial funds that could have otherwise
been used to improve the company¶s business or
increase its profits.
Greenmail or greenmailing is the practice of
purchasing enough shares in a firm to threaten a
takeover and thereby forcing the target firm to
buy those shares back at a premium in order to
suspend the takeover.
The term is a derived from blackmail and
greenback as commentators and journalists saw
the practice of said corporate raiders as
attempts by well-financed individuals to
blackmail a company into handing over money
by using the threat of a takeover.
To generate large amounts of money by hostile takeovers of large, often
undervalued or inefficient (i.e. non-profit-maximizing) companies, by either
asset stripping and/or replacing management and employees. However,
once having secured a large share of a target company, instead of
completing the hostile takeover, the greenmailer offers to end the threat to
the victim company by selling his share back to it, but at a substantial
premium to the fair market stock price.
From the viewpoint of the target, the ransom payment may be referred to as
a goodbye kiss. The origin of the term as a business metaphor is unclear,
although it will certainly be understood in context as kissing the greenmailer
and, certainly, millions of dollars goodbye. A company which agrees to buy
back the bidder's stockholding in the target avoids being taken over. In
return, the bidder agrees to abandon the takeover attempt and may sign a
confidential agreement with the greenmailer who will agree not to resume
the maneuver for a period of time.
While benefiting the predator, the company and its shareholders lose
money. Greenmail also perpetuates the company's existing management
and employees, which would have most certainly seen their ranks reduced
or eliminated had the hostile takeover successfully gone through.
Greenmail proved lucrative for investors such as T. Boone Pickens and Sir
James Goldsmith during the 1980s. In the latter example, Goldsmith made
$90 million from the Goodyear Tire and Rubber Company in the 1980s in
this manner. Occidental Petroleum paid greenmail to David Murdoch in
The St. Regis Paper Company provides an example of greenmail. When an
investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis
and expressed interest in taking over the paper concern, the company
agreed to repurchase the shares at a premium. Goldsmith's group acquired
the shares for an average price of $35.50 per share, a total of $109 million.
It sold its stake at $52 per share, netting a profit of $51 million. Shortly after
the payoff in March 1984, St. Regis became the target of publisher Rupert
Murdoch. St Regis turned to Champion International and agreed to a $1.84
billion takeover. Murdoch tendered his 5.6% stake in St. Regis to the
Champion offer for a profit. (Source: J. Fred Weston, Mark L.Mitchell J.
Harold Mulherin -- Takeovers, Restructuring, and Corporate
A special clause located within a firm's corporate
charter that acts as a deterrence against the
board of directors passing a share buyback.
This provision acts as a preventative measure,
restraining managers from buying back
company stock at significant premiums due to
greenmail. A majority shareholder may be able
to influence the board into purchasing shares at
a significant premium, so the anti-greenmail
provision requires that a majority of
shareholders (excluding the majority
shareholder) agree to the buyback.
An offer made by one company to buy the shares of
another for a much higher per-share price than what
that company is worth. A bear hug offer is usually
made when there is doubt that the target company's
management will be willing to sell.
The name "bear hug" reflects the persuasiveness of
the offering company's overly generous offer to the
target company. By offering a price far in excess of the
target company's current value, the offering party can
usually obtain an agreement. The target company's
management is essentially forced to accept such a
generous offer because it is legally obligated to look
out for the best interests of its shareholders.
The basic strategy of the bear hug generally
involves the attempted acquisition of a company
that is currently not for sale. Investors take note
of a company that is consistently performing
well, and decide to take step to acquire that
company. In many cases, an initial offer may
have been rejected. This leads to the
implementation of more aggressive methods
that are designed to lead to the eventual
acquisition of the company, whether the board of
directors of the corporation like it or not.
Selling off Assets
Corporate raiders have long employed the
strategy of the bear hug as a means of
acquiring a company and then
systematically dismantling the operation.
By acquiring a company and selling off its
assets, equipment, and property, the
raider can often make an impressive profit
from the venture
While the bear hug is often successful, companies
have managed to avoid this sort of situation. When it
seems that a corporate raider is acquiring an
inordinate amount of stock, steps can be taken to
minimize the amount of influence that the raider may
assert on the board and the other shareholders.
In some countries, raiders have to file papers with the
local government upon acquiring a certain percentage
of available stocks. These papers outline the intent of
the raider to acquire the company, and are made
available to the current ownership.
When steps are taken early in the process, it is
possible to avoid a hostile takeover, and thus defuse
the bear hug before it ever has a chance to damage
the operations or reputation of the company.
Bear Hug Letters
Bear hug letters are an art form. They are designed
to put an unwilling takeover target on notice that they
are no longer safe, but to fall short of being blatantly
Microsoft¶s bear-hug letter to Yahoo, made public
along with Microsoft¶s unsolicited $44.6 billion
takeover bid, is no different. It contains all the nice-
nice language you typically see in these letters (this is
the hug) as well as a warning that there is a bear
waiting to come out.
Comcast has offered more than $40 billion in
stock for AT&T's cable business.
Satellite TV provider EchoStar dangled a $30
billion bid for Hughes Electronics, the owner of
EchoStar rival DirecTV.
And telecom company Alltel is wooing
CenturyTel shareholders with a $9 billion deal.
SBARE EXCBANuE RATI0
The share exchange ratio is the number of shares that
the acquiring firm is willing to issue for each share of
the target firm.
The swap ratio also determines the control that each
group of shareholders will have over the combined
ETB0BS 0F CALC0LATI0N
BASED ON EARNINGS PER SHARE (EPS)
Share Exchange Ratio = EPS of the target firm / EPS of
the Acquiring firm
BASED ON MARKET PRICE (MP)
Share Exchange Ratio = MP of the target firm¶s share /
MP of the Acquiring firm¶s share
BASED ON BOOK VALUE (BV)
Share Exchange Ratio = BV of share of the target firm /
BV of share of the Acquiring firm
Bootstrap financing is to build a
business out of little or nothing with no or
minimal outside capital
Manage Cash flow well
You'll improve your bootstrap financing
dramatically if you keep your inflows high, and
your outflows low. Constantly find ways to widen
this gap. Cash flows is the lifeblood of your
company. To do this, improve your accounts
receivable by collecting quicker. If you have
accounts payable on hand, delay it for as long
as possible without penalty. Rid excess
inventory. Most importantly again, manage
expenses wisely by spending only on what fits
Advantages to Bootstrap
Besides being one of the most inexpensive ways to
raise capital for your business, bootstrap financing
also looks good to outside lenders when the time
comes to raise money through these routes. It also
makes your business more valuable since no money
was borrowed and no equity positions of the company
had to be given up. Also there is no interest that must
be paid since the money you get is generated from
your own business and it's resources.
Types of Bootstrap Financing
Factoring- Using your accounts receivable to generate cashflow by
selling them to a "Factor," at a discount, in exchange for cash.
Trade Credit- If your business can find a vedor or supplier to extend
trade credit and allow you to order goods on net 30, 60, or 90 day
terms, that is another form of bootstrap financing you could use. If
your business is able to sell the goods before the payment is due,
then you just generated cashflow without using any of your
companies own cash.
Customers- Your business can use a letter of credit from your
customer to purchase materials without using any company
resources. Just like when a contractor has their customer pay up
front and then uses that money to buy the materials they need to
complete the job.
Leasing- Free up cash by leasing equipment rather than purchasing
Lack of Communication
Poor communication between people at all
levels of the organization, and between
the two organizations that are merging is
one of the principal reasons why mergers
fail. Not only a lack of communication a
serious issue for merging organizations
Lack of Direct involvement by Human resources:
The early stages of mergers and acquisitions
are often carried out in secret and do not usually
involve human resources in the discussions. The
lack of involvement by human resource can
have a detrimental impact on the merger, since it
means that many issues that are directly linked
to the success or failure of the merger will have
Lack of Training:
Lack of training, not only of employees throughout the
merging company, but also the senior managers and
HR professionals who are supposed to oversee the
merger process, is one of the main contributors of
Therefore, senior managers are often reluctant to
involve human resources professionals in the merger
process because they do not believe that HR possess
the skills required to contribute to the merger process.
Loss of key people and Talented employees:
Mergers and acquisitions often lead to the loss
of the merging companies greatest assets:
talented employees and key decision-makers.
Acc. to the American Management Association,
one out of four top performers leaves the
company within 3 months of the announcement
of an event involving major change in the
Loss of Customers
With the loss of employees also comes the
loss of customers during mergers and
acquisitions. Some of the most talented
employees, responsible for bringing in
valuable business to their organizations,
are often the ones who leave, resulting in
the loss of key customers.
Corporate Culture Clash
Even if two companies seem to have all the right
ingredients in place for a successful merger, cultural
differences can break the deal. It is not enough for two
companies to appear to fit well on paper, at the end of
the day, if the people are not able to work together, the
merger will not succeed.
Example: Daimler Chrysler merger. Bother expressed
their commitment in beginning to working together and
sharing work practices and product development
methods, this commitment did not materialize, , As
Daimler management¶s unwillingness to use Chrysler
parts in cars.
Clashes between the management of the
two companies, as well as clashes within a
company¶s own management, can lead to
the demise of a merger.
Role of HR in M&A
Human Resources professional should
take an active role in educating senior
executives about HR issues that can
interfere with the success of the merger
and with meeting key business objectives.
HR professionals can play an active role in
the change process by offering
interventions that will help ensure a
Facilitates Transition Teams:
Transition teams are used to study and recommend
options for combining the two companies in a merger.
To discourage decision-making based on personal
agendas or politics, human resource professional that
facilitate transition teams should work with team
leaders to run effective meetings.
This gives all team members an opportunity to
contribute their viewpoints
Educate Managers & Employees:
To minimize stress and uncertainty in the
organization during the merger process,
develop and deliver educational seminars
to help employees and managers manage
stress, low morale and productivity issues
in work groups.
These seminars should focus on specific
issues affecting employees rather than on
change management in general.
Develop Newly Formed Teams:
After implementation of merger as new teams
are formed, they may experience problems
arising due to interpersonal conflict, unclear
roles and responsibilities, and confusing
A process to develop newly formed teams,
review this process with managers and
supervisors and offer to help launch new teams
by providing consultation should be created.
Reinforce the New Culture:
When two companies with vastly different cultures merge,
help the management to preserve the best aspects of the old
company and carry them into the new company.
Find out what cultural characteristics and values senior
executives want to preserve from their respective companies,
what they don't want to keep, and what new characteristics
they want to introduce in the new organization.
Make a list and ask each level of management for feedback.
Provide management with a development tool.
Survey all levels of management about three months after the
merger, to assess progress towards the new culture, and
provide feedback to managers.
Involve in Planning, Transition & Integration Teams:
HR professionals need to contribute specific expertise to these
teams, enabling the merger to be managed as a project while
keeping core business going.
Develop effective ways of collaborating with the planning team from
other company in pre-merger phase.
Place framework in place for managing the different phases of the
Find ways in which people from both the companies can get to know
Identify how emerging organization's vision can best be
Take "best of both" rather than "equal shares" or "acquirer
dominates" approach to decide the roles and working practices to be
Decide fair principles on the handling of redundancies.
Identify HR Issues & Carry Out an Effective HR Due Diligence:
Comparing terms & conditions of employment and salary scales.
Understanding the skills of present HR team - are they adequate to
coordinate proposed changes to the business?
Understanding the organizational structure.
Identifying what is required in terms of manpower plan to achieve
the business strategy.
Identifying key personnel - to what extent is the necessary
knowledge & skill vested in staff critical to running the business?
Identifying which job descriptions need to be changed.
Comparing ways of working and identifying differences which need
to be addressed.
Is the organization unionized or does the employee representation
group have negotiations rights, and if so, what do these rights
Carry Out Effective HR Integration:
Carrying out effective HR integration on
the following: -
Terms & Conditions
Culture & Management Style
Career & other Development Issues
Help Line Managers to Communicate Effectively During
Managers play key role in communication about merger.
Need practical help in understanding how to communicate
Recognizing that merger is an emotional issue for the
Employees need to be communicated with and convinced of
the benefits at an emotional and not just a rational level.
Main challenge of line managers is "getting staff into
confidence" - Raise the morale of the staff.
Personalize the message given through corporate videos.
Ability to develop two-way communication.
HR can provide practical help with team briefings and
Managing Individuals with Dignity:
CEOs are keen to get through the difficult task of re-
organization and job losses.
Such speed in dealing with employees may compromise on
fairness and dignity.
Handling of key changes for individuals such as job changes,
appointments, relocations and exits sets the tone for staff
view the new organization.
Handling redundancies inappropriately usually results in a
memorable backlash among 'survivors'.
Developing & Implementing Actions to Retain Key
Key employees have to stay if both the organizations
are to learn from each other's strengths.
Line managers should identify key employees and
involve them in merger process.
If neglected in early stages, they can prove harmful for
the smooth running of an organization.
Organization should develop retention strategies.
Financial incentives are not always necessary, letting
people know that they are valued can be sufficient
encouragement for them.
Help Clarify Roles:
People need help in clarifying their roles.
Knowing where they fit in the organization.
May require them to learn new skills or
adjust their working practices.
Briefings & Training in necessary.