Publicly listed companies are most affected by threats of hostile takeovers. However, over time, they have come up with various defense mechanisms to prevent such acquisitions.
Publicly listed companies are most affected by threats of hostile takeovers. However, over time, they have come up with various defense mechanisms to prevent such acquisitions.
Tesla CEO Elon Musk’s bid to acquire Twitter was partially thwarted on Saturday with the microblogging platform deploying a ‘poison pill’ mechanism. The ‘poison pill’ mechanism is used to dilute the shares of a company so that active investors looking for a hostile takeover cost heavily.
As part of the mechanism, Twitter introduced a shareholder rights scheme, which will kick in when an entity acquires a stake of 15% or more. The plan would allow existing shareholders, except for Mr. Musk, to buy additional shares at a discounted rate to the acquiring entity, making it difficult for the acquirer to establish a majority stake in the company. The move will also reduce the chances of the company gaining control of the company without paying a reasonable premium to the other shareholders. This was to buy more time as the company’s board strives to “make informed decisions and act in the best interest of shareholders”.
Publicly listed companies around the world often face the threat of hostile takeovers through backdoor accumulation of shares; In other words, getting a larger share of shares from the open market than management. However, over time, even listed companies have been able to come up with several defense mechanisms to prevent such acquisitions. Some of them include:
Greenmail Defense
The idea here is simple: Pay them to walk away and stop making hostile takeover threats to the company.
In this, the target company repurchases its own shares at a premium and in amounts sufficient to prevent a hostile takeover. This practice had once become a means for many active investors to sell their shares at a premium by threatening hostile takeovers.
wall street journal Says that the practice, widely criticized as ‘corporate blackmail’, died out after the 1990s as “companies strengthened defenses and lawmakers took steps to discourage it.”
In 1986, broadcast company Viacom International ended a two-week long siege by repurchasing 17% of its own shares from major institutional investor Carl Icahn at $62 per share. Wall Street professionals estimate the deal helped recover $21 million from investors Los Angeles Times, Mr. Icahn’s group spent an average of $65.75 per share, or a total of $230 million for 3.5 million shares of Viacom. However, the target company issued warrants priced between $65.375 and $72 for each of its common stock, which were exercisable for six years. Warrants are instruments that give the holder the right, but not the obligation, to acquire a company’s common stock at any time before its expiration at a specified quantity and price. “Analysts said the warrants were attractive because there were broad forecasts that Viacom stock would rise in value over the next few years,” new York Times mentioned in its report. In addition, the publication reported, that the active investor was granted $10 million worth of free commercial air time on the company’s radio and television stations.
crown jewel defense
Mechanisms include the target company spinning-off its Crown Jewel unit, or its most valuable asset, to make the takeover less desirable for the acquirer. The asset can be the entity that is the most profitable entity in the company, or is important for future profitability, or produces the principal product of the company.
In September 2020, France-based Veolia Environment SA launched a bid to acquire 30% of utility company Suez SA from state-backed utility company Angie. financial publication bloomberg reported that the acquirer was exploiting a depressed COVID-19 situation opportunistically. It was reported, “Suez’s justified outrage at the move, which would put Veolia boss Antoine Freirot in pole position to swallow the entire company, has not, however, been supported by a solid alternative.”
Defense was centered around the French water business of Suez. News agency Reuters In April 2021 it was reported that in an effort to force Veolia into negotiations, Suez had set up a Dutch foundation to prevent the sale of a water business deemed necessary to its rival and thus to buy Suez. Obtained a no-confidence motion. The Dutch foundation was there to ensure that the company would have a symbolic yet powerful piece and would not separate from the group. In turn, this would make Suez unpurchasable.
pac man defense
The idea is simple: stop a hostile takeover by initiating a reverse takeover. This includes the target company offering to acquire the company that initiates the takeover bid. The target company can use its ‘war chest’ or get outside finance for reverse takeover bid.
Pac-Man was a popular old video game. The player needs to swallow all the power bullets to escape the ghosts that are chasing the Pac-Man character. Once the player has collected all the bullets, the ghosts turn blue, allowing ‘Pac-Man’ to eat them and gain bonus points.
In 1999, the Chesapeake Corp., a Richmond-based paper-recycling company, launched an unsolicited bid for Shorewood Packaging. The latter had previously offered to buy the former Chesapeake for $40 million each for $480 million. In response, Chesapeake increased its bid to acquire Shorewood from an initial $16.50 per share to $17.25 per share, the report reported. CNN Money, Shorewood declined the offer and after three months it was acquired by International Paper, a North America-based company.
White Knight Defense
If the board of a company finds itself in such a position that it cannot prevent a hostile takeover, it seeks a more favorable and amicable firm to acquire a controlling stake from the hostile acquirer. The ‘White Knight’ agrees to the reorganization of the Company, substantially complying with the wishes of the Board of the Target Company, as well as providing a reasonable consideration.
An important case is Fiat, the automobile manufacturer that pulled Chrysler out of a liquidation crisis in 2009.
Chrysler, like many other automobile manufacturers at the time, was seeing a decline in sales following the 2008 global economic crisis. It had to start bankruptcy proceedings in April 2009. It started looking for a potential buyer who could get it out of trouble. Putting some cash into the company. Chrysler was previously awarded a $4 billion grant from the US Treasury Department in December 2008 and $4 billion in 2009 to keep the company afloat. But the other overall macroeconomic slowdown didn’t help its revival ambitions. Its close deals with Nissan and Kia Motors fell through for the same reason. Additionally, companies were believed to be unwilling to pour cash into the troubled company.
Fiat later emerged as the White Knight. The terms of the deal stated that Fiat would not immediately inject cash into the company, but as wall street journal It is reported to have received a stake in the United States in exchange for covering the cost of remodeling the Chrysler plant to produce the Fiat model and provide engine and transmission technology.