TAKEOVER

DEFENSES

ANKIT SINGHAL
IFMR GSB
• Highlight the different anti takeover defenses
• Summarize the empirical findings on the impact of takeover defenses on shareholder
value
 HOSTILE TAKEOVERS

The acquirers usually employ the following hostile takeover techniques:

• Toehold acquisition – a purchase of the target’s shares on an open market.
• They allow the acquirer to become a shareholder of the target and provide
an opportunity to sue the target later on if the takeover attempt turns out
unsuccessful.
 TENDER OFFER

• An acquirer’s offer to the target’s shareholders to buy their shares at a premium over the
market price.
• A partial, two-tier, front-end loaded tender offer usually involves a back-end merger.
• The takeover literature generally treats tender offer as a hostile takeover technique. It should
not be treated as hostile, however, if it favors the interests of the majority of shareholders.
• Such a majority should be adequate to approve the relevant merger or acquisition.
 ANTI-TAKEOVER DEFENSES

• Stock repurchase : Stock repurchase (aka self-tender offer) is a purchase

by the target of its own-issued shares from its shareholders. 
 POISON PILL

• Poison pill (aka shareholder rights plan) is a defense strategy in which the target company offers
its stockholders preferred stock in the merged firm – at a highly attractive rate of exchange.
• The rationale is to dilute the stock so such that the attacking firm losses money on its investment
• The poison pill is one of the most powerful defenses against hostile takeovers.
• The pills can be of three different types:-
• Flip-in poison pill
• Dead hand pill
• No hand (aka slow hand) pill
• Flip-over rights poison pill
• A poison pill with flip-over rights distributes rights rather than shares of preferred stock, issuing them to existing
stockholders who can then buy preferred stock at a deeply discounted price.
• Such rights are advantageous in defending a target firm because of the negative impact preferred shares have on a
balance sheet
• They are not exercisable unless the bidder acquires 100% of the target firm,
• Flip-in poison pill 
• With flip-in options, stockholders are given the right to acquire additional shares in the target company at a
substantially lower price than the current offerings.
• For every share of common stock investors have in the target company, they are issued one right that allows them to
purchase one share of the stock during a period of time known as exercise period
 STAGGERED BOARD

• Staggered board is a board in which only a certain number of directors,

usually one third, is reelected annually.
• It is a powerful antitakeover defense, which might be stronger than is
commonly recognized.
• For the reason of being too strong and reducing returns to the target’s
shareholders, the latter happened to resist this type of defense.
 SHARK REPELLANTS

• Shark repellants are certain provisions in the target’s charter or bylaws

deterring an acquirer’s desirability of a hostile takeover.
• This defense typically involves a supermajority vote requirement
regarding a merger of the target with its majority shareholder.
• This defense also includes other takeover deterrent provisions in the
target’s certificate of incorporation or bylaws.
 GOLDEN PARACHUTES

• Golden parachutes are additional compensations to the target’s top

management in the case of termination of its employment following a
successful hostile acquisition.
• Since these compensations decrease the target’s assets, this defense
reduces the amount the acquirer is willing to pay for the target’s shares.
• This defense may thus harm shareholders. It, however, effectively deters
hostile takeovers.
 GREENMAIL

• Greenmail is a buyout by the target of its own shares from the hostile
acquirer with a premium over the market price, which results in the
acquirer’s agreement not to pursue obtaining control of the target in the
near future.
• The taxation of greenmail used to present a considerable obstacle for this
defense. Plus, the statute may require a shareholder approval of repurchase
of a certain amount of shares at a premium.
 STANDSTILL AGREEMENT

• Standstill agreement is an undertaking by the acquirer not to acquire any

more shares of the target within certain period of time.
• A standstill agreement is an additional defense that usually accompanies
the greenmail described above.
 LEVERAGED RECAPITALIZATION

• Leveraged recapitalization (aka corporate restructuring) is a series of

transactions designed to affect the equity and debt structure of a
corporation.
• Recapitalization usually involves such transactions as (i) sale of assets,
(ii) issuance of debt, and (iii) distribution of dividends.
 LEVERAGED BUYOUT

• Leveraged buyout is a purchase of the target by the management with the

use of debt financing.
• This defense burdens the target with the debt.
• In such a case, the management becomes a bidder and competes with a
hostile acquirer for control over the target.
• Pacman: Pacman is a target’s tender offer for the acquirer’s shares.

• White knight: White knight is a strategic merger that does not involve a change of control and relieves
the target’s management of the responsibility to seek the best price available.

• White squire: White squire is giving by the target to a friendly party of a certain ownership in the target.
• This defense is effective against acquisition by the hostile party of a complete control over the target by
“freezing out” of minority shareholders.
• Change of control provisions
• Change of control provisions is target’s contractual arrangements with third parties that burden
the target in the case of a change in its control.

• “Just say no”

• On top of all, the “just say no” approach is a board’s development and implementation of a long-
term corporate strategy which enables the board simply to reject a proposal of any potential
acquirer who would fail to prove that his acquisition strategy matches that of the target.
HOSTILE TAKEOVER DEFENSE STRATEGIES

Effectiveness as
Defense strategy Categeory Popularity among firms a defense Stockholder wealth effects

Poison Pills - plus flip-over rights and flip in options Preventive High High Positive

Golden Parachutes Preventive Medium Low Negligible

Greenmail Reactive Very Low Medium Negative

Standstill agreements Reactive Low Low Neagtive

Capital Struture changes - recapitalization, new debt,

stock selling, share buybacks Reactive Medium Medium Inconclusive
• Defenses that make the purchase the target’s shares less attractive
• Defensive Transactions and Restructuring
• The ‘Pac-Man’ Defense
• White knights and Friendly Block-Holders.
• Dual class re-capitalization
• Poison Debt and Control clauses
• Stock Repurchases to Strengthen the managerial holdings
• Golden Parachutes
• The Flip-Over (Non-Discriminatory) Poison Pill
• DeAngelo and Rice (1983) argues that defenses promote the interests of the target firm's
shareholders by raising takeover premiums, improving management or protecting the firm’s
long term strategy
• Byrd and Stammerjohan (1997) suggests executives’ efforts at self-preservation – rather
than shareholder value maximization - can result in significant negative returns for
shareholders
• Harber (2002), 283 companies enacted poison pills defenses, up from 167 in 2000.
• Malatesta and Walking (1998) found a small but significantly negative return within two
days of the announcment
• Walking and Long (1984) found that the probability of executives resisting a takeover bid is
directly related to the takeover’s effect on their personal wealth
• The effect of greenmail payments on shareholder wealth is generally but not necessarily
negative.
• Bradley and Wakeman (1983) found initial drops in target stock prices, whereas Mikklelson
(1991) reported a 7% rise in stock price when the attack was repelled
• Heinkel and Hollifield (1997) concludes that greenmail results in a loss to stockholders
significantly larger than amount of the payoff unless greenmail is combined with a poison
pill.