ANTI TAKEOVER DEFENSE

MEANING OF TAKEOVER
Takeover implies acquisition of controlling interest in a company. It does not lead to the dissolution of company whose shares are being have been acquired. It simply means a change of controlling interest in a company through the acquisition of its shares by another group.

3 FORMS OF TAKEOVER

NEGOTIATED/ FRIENDLY

OPEN MARKET/ HOSTILE

BAIL OUT

ANTI TAKEOVER DEFENSE STRATEGY

POISON PILL CORPORATE CHARTER AMENDMENTS GOLDEN PARACHUTE

PREVENTIVE

TAKEOVER DEFENSE

GREEN MAIL

STANDSTILL AGREEMENT

ACTIVE

WHITE KNIGHTS

WHITE SQUARE

RECAPITALISATION

PREVENTIVE ANTI TAKEOVER DEFENSE

POISON PILL

 A poison pill is an attempt to discourage an acquisition by making it more expensive to acquire a company, or by reducing the value of the acquired business. 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. For example, a company could have a poison pill that goes into effect when a hostile bidder acquires 20 percent of the company. Poison pills are usually set up to last for 10 years, after which they can be renewed or allowed to expire.

TYPES OF POISON PILL

Flip in
A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount. For example, the rights become exercisable to purchase the target company's common stock at 50 percent discount from market price in the event the acquirer purchases more than, say, 30 percent ownership in the target company. The acquirer is precluded from exercising flip-in rights.

FLIP OVER
A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.

CORPORATE CHARTER AMENDMENTS

STAGGERED BOARD AMENDMENTS

It is a type of defense where the terms of the board of directors so that only a few such as one-third of the directors may be elected during any one given year It requires share holder approval before they can be implemented Classified directors cannot be removed before their term expires

SUPERMAJORITY PROVISIONS
These provisions usually require that at least 80% of voting shareholders approve of the takeover, as opposed to a simple 51% majority. Such a requirement can make it nearly impossible for an acquirer to obtain enough votes approving the takeover.

FAIR PRICE PROVISIONS

It is a modification of corporations' charter that requires the acquirer to pay minority shareholders at least a fair market price for the companys stock. -it is usually in terms of companys P/E ratio -its a weak takeover defense

DUAL CAPITALIZATION
Restructuring of equity into two classes of stock with different voting rights

GOLDEN PARACHUTE
Special lucrative compensation agreements that the company provide to Top management it may be used both as a preventive measure and as an active measure It is triggered by some predetermined ownership of stock by an outside entity

EXAMPLE
1. Procter & Gamble's successful acquisition of Gillette- CEO, James Kilts, received a golden parachute worth $188 million 2. Oracle's acquisition of Sun Microsystems- Sun CEO Jonathan Schwartz will receive a severance package of about $12 million, and co-founder and chairman Scott McNealy will get around $9.5 million

ACTIVE ANTI-TAKEOVER DEFENSES

GREENMAIL
It refers to the payment of a substantial premium for a significant shareholders stock in return for the stockholders agreement that he or she will not initiate a bid for control of the company Company example: Disney & Saul Steinberg

STANDSTILL AGREEMENT
An agreement between a target company and a potential hostile acquirer whereby the acquirer agrees not to buy any more of the target company in exchange for some compensation. The compensation may be monetary; that is, the company can simply buy off the acquirer. More commonly, it involves some other incentive such as a seat on the board of directors. Company example: Chrysel corporation

WHITE KNIGHTS
Another company more acceptable More favorable terms than original bidders Terms required Not to disassemble No layoffs

EXAMPLE EUROPEAN STEEL MAKER ARCELOR AND MITTAL

WHITE SQUIRE
Target sells only a block of its stock to third party it considers to be friendly In return, white squire may receive: board seats, dividend, discounted shares Preferred stock usually used in white squire transactions because it enables board to tailor characteristics of stock as described EXAMPLE WARREN BUFFET

RECAPITALIZATION
PRINCIPAL FORMS OF RECAPITALIZATIONS  Share repurchase  Special dividend  Leveraged recapitalization

Motivation behind Recapitalization

Enhance shareholder value For e.g. In 1997, coca-cola opted for buy-back of 8.3% of their equity that raised the price of the scrip by a 42% in the New York stock exchange Distribute excess cash For e.g in June 2007 Guj.Amb. Earned 250 cr. On the sale of shares to holder ind Investment ltd. In addition co. earned 325 cr. From sales of assets co. gave rs.1.30 per share of rs.2 each as special dividend and rs. 1.20 normal dividend total dividend is 2.50 on the face value of rs. 2

Thwart unwanted takeover threat For e.g. In 1985 attempted hostile takeover of union carbide corporation by GAF corporation . To thwart the offer union carbide offered its shareholders $ 20 per share in cash + $ 65 in debt securities . The entire package was valued $ 85. Concentrate equity ownership For e.g. In the multimedia transaction in 1985 management increased their ownership in the co. from 13% to 43% post recapitalization

Advantages of Recapitalization
Lower s company s cost of capital Enhance shareholder value Concentrates equity in hands of loyal shareholders Effective means to distribute cash May signal stock is undervalued Provides current return plus future upside

Disadvantages
May result in over leverage and consequently severe financial distress and bankruptcy Increase in leverage may constrain operating and financial flexibility May send negative signal in that the market may perceive the recapitalization as a sign the company has few other investment or growth opportunities Masking financial ratios may cloud true financial performance

ESOPs
TYPES OF ESOPs LEVERAGED ULEVERAGED ESOPs LEVERAGEABLE ESOPs TAX CREDOT ES

REASON FOR ESOPs

GOOD MOTIVATOR TO ATRACT AND RETAIN OFFER REWARDS RETIREMENT BENEFITS

LITIGATION

PAC-MAN DEFENSE
Best Defense is a Good Offence It occurs when the Target makes an offer to buy the Hostile company in response to Hostile bid for the Target Highly aggressive defense technique Counter tender offer in response Possible only if financial resources May result into May defend May end up extremely destructive High debts

JUST SAY NO
A strategy used by corporations to discourage hostile takeovers in which board members reject a takeover bid outright. The case of Paramount Communications vs. Time, Inc

CROWN JEWELS
It is a strategy in which the target company sells off its most attractive assets to a friendly third party or spin off the valuable assets in a separate entity unfriendly bidder is less attracted to the company assets

RESTRUCTURING
Going private
Buying bulk of the shares

Sales of attractive assets

Making less attractive

Undertaking major acquisitions

Draining its excess cash balance

Liquidating the firm

When liquidation is better than the bid

EXAMPLE
Punjab National Bank has been in the forefront of restructuring