Hostile & Defensive Takeover Strategies

Mergers & Acquisitions:
DEFENSIVE & HOSTILE TAKEOVER STRATEGIES

BY: Chanchal Yadav Ishan Jinsi Mantaran Bimbra Nikita Jain Vinod Shobhit Bhatnagar
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MERGER
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Merger is considered to be a process when two or more companies come together to expand their business operations. In such a case the deal gets finalized on friendly terms & both the companies share profits in the newly created entity. In other words, a merger is when two companies become one. This decision is usually mutual between both firms.
Hostile & Defensive Takeover Strategies 11/29/2012
ACQUISITION
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A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm.
Acquisitions are often made as part company's growth strategy whereby it is beneficial to take over an existing operations & niche compared to expanding own.
of a more firm's on its
Acquisitions are often paid in cash, the acquiring Hostile & Defensive Takeover Strategies 11/29/2012 company's stock or a combination of both.
DIFFERENCE
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Merger
Acquisition
Here two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned & operated. Both companies' stocks are surrendered & new company stock is issued in its place.
Here one company takes over another & clearly establishes itself as the new owner. From a legal point of view, the target company ceases to exist as the buyer swallows the business & the buyer's stock continues to be traded.
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Hostile & Defensive Takeover Strategies
Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile & how it is announced.
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HOSTILE TAKEOVER
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The acquisition of one company (target company) by another (acquirer) that is accomplished not by coming to an agreement with the target company, but by going directly to the companys shareholders or fighting to replace the management in order to get the acquisition approved. The key characteristic of a hostile takeover is that the target company does not want the deal to go through. Sometimes a company's management will defend against unwanted hostile takeovers by using several Hostile & Defensive Takeover Strategies 11/29/2012 controversial strategies.
DEFENSIVE/FRIENDLY TAKEOVER

A situation in which a target company & its board of directors agree to the acquisition by the acquirer. Here a public offer of stock or cash is made by the acquiring firm, & the board of the target firm publicly approves the buyout terms, which may yet be subject to shareholder or regulatory approval. The acquiring company will offer a premium to the current market price, but the size of this premium will determine the overall support for the buyout within the target company.
TAKEOVER STRATEGIES
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PROXY CONTEST
BEAR HUG
CROWN JEWELS
POISON PILL
WHITE KNIGHT
PROXY CONTEST
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It is considered to be a hostile takeover strategy. Here a group of shareholders are persuaded to join forces & gather enough shareholder proxies to win a corporate vote. The acquirer will persuade existing shareholders to vote out company management so that the company will be easier to takeover. It is also known as proxy fight or proxy battle.
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PROXY CONTEST (contd.)

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For example,
In 2001, a proxy fight took place within Hewlett-Packard, when the management of that company sought to take over Compaq. Board member & shareholder Walter Hewlett, David W. Packard & other family members opposed the takeover. The families felt the merger would force HP to become reliant on the lower-margin PC business & would result in a lot of people loosing their jobs. However, the opponents of the takeover lost the fight & Compaq was acquired for $25 billion. The management, under Carly Fiorina, remained in place, & the merger went ahead.
BEAR HUG
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It is considered to be a hostile takeover strategy. 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. Such an offer is usually made when there is doubt that the target company's management will be willing to sell. By offering a price far in excess of the target company's current value, the offering party can usually obtain an agreement, as the target company is essentially forced to accept such a generous offer because it is legally obligated to look out for the best interests of its shareholders.
BEAR HUG (contd.)

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For example,
In 2008, Microsoft employed the bear hug strategy to takeover Yahoo. Microsoft offered shareholders $31 for each of their shares, which represented a 62% premium on the closing price on the prior day. The $44.6 billion bid was biggest ever in the tech sector. The bid was kept this high to make it hard for the investors & board members to resist. But the offer was ultimately withdrawn three months later following resistance from Yahoo.
ARCELOR vs. MITTAL

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ArcelorMittal is a global steel company headquartered in Luxembourg formed in 2006 by the take over of Arcelor by Mittal Steel. It is currently the largest steel producing firm of the world, which produces roughly 10% of the worlds steel. It was a hostile takeover worth about $33 Billion It replaced a previously planned merger between Arcelor & Severstal, which had lacked sufficient shareholder approval. On 26 January 2011, the Stainless steel division of Arcelor split off as a new company, Aperam.
WHITE KNIGHT
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It is a defensive strategy employed by the target company to discourage hostile takeovers by unfavorable acquirers. A white knight is an individual or company that acquires a corporation on the verge of being taken over by forces deemed undesirable by company officials (also know as a black knight). While the target company doesn't remain independent, a white knight is viewed as a preferred option to the hostile company. Unlike a hostile takeover, current management remains in place in a white knight scenario & investors receive better compensation.
WHITE KNIGHT (contd.)

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The white knight is the savior of a company in the midst of a hostile takeover. Often a white knight is sought out by company officials - sometimes to preserve the company's core business & other times just to negotiate better takeover terms. In addition to white knights & black knights, there is a third potential takeover candidate called a gray knight. As one might guess, a gray knight is not as desirable as a white knight, but more desirable than a black knight.
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WHITE KNIGHT (contd.)

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For example,
In 2009, Fiat took over Chrysler, saving the struggling automaker from liquidation. Fiat is one of the world's largest automakers, but it made headlines by grabbing control of the bankrupt automaker Chrysler Fiat was the corporate hero that enabled Chrysler to bounce back from its 2009 low pointwhen it filed Chapter 11 bankruptcy & received a $12.5 billion government bailout. Fiats initial stake in Chrysler was 20%; however currently it is 58.5%.
CROWN JEWELS
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It is considered to be a defensive strategy used by target company to avoid a hostile takeover. A company can employ this crown jewels defense by creating anti-takeover clauses which compels the sale of their crown jewels if a hostile takeover occurs. This deters would be acquirers from attempting to take the firm over. In other words, the target company sells off its most attractive assets to a friendly third party or spin off the valuable assets in a separate entity. As a result, the unfriendly bidder is less attracted to the company assets.
CROWN JEWELS (contd.)

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For example,
In 1997, Hilton Hotels Corporation made an unsolicited $6.5 billion takeover offer for the ITT Corporation. The acquisition would have made Hilton the largest hotel & gambling company in the world. The first action that ITT took to discourage takeover by Hilton, was to start selling its assets or Crown Jewels aggressively. ITT did this to make the company seem as ugly, poor & as worthless as possible. And only after ITT had sold assets worth $2 million Hilton discontinued its takeover attempt.
GREEN MAIL
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A situation in which a large block of stock is held by an unfriendly company. This forces the target company to repurchase the stock at a substantial premium to prevent a takeover. In other words, here enough shares of the target firm are purchased to threaten a takeover, thereby forcing the target firm to buy those shares back at a higher price to suspend the takeover. Like blackmail, this is a dirty tactic, but it's very effective It is also known as a bon voyage bonus or a goodbye kiss.
GREEN MAIL (contd.)

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For example,
Investor Saul P. Steinberg attempted to takeover the Disney Corporation in 1984. Steinberg was known for his concerted efforts in the takeover field, having previously targeted Chemical Bank & Quaker State. In 1984, his purchase of 6.3 percent of Disney's stock triggered concern at the corporation that a takeover was in progress. After a failed maneuver of announcing a $390 million acquisition of its own to make the company less attractive, Disney ultimately bought Steinberg's stock. Steinberg earned a profit of about $60 million.
POSION PILL
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It is considered to be a defensive strategy used by target company to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. When a shareholder acquires a percentage of shares above a certain threshold, the pill is activated. Setting off the pill means that the poison is taken, & the net result is that every shareholder but the one who sets it off receives discounted stock. Consequently, the stake of the trigger-puller gets hugely diluted.
POSION PILL (contd.)

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Poison pill raises the cost of mergers & acquisitions. At times, they create enough of a disincentive to deter takeover attempts altogether. As a strategy, poison pills are only effective as a prevention. When actually put into effect, they often create potentially devastatingly high costs & are usually not in the best long-term interests of the shareholders.
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POSION PILL (contd.)

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For example,
The board of film rental firm Netflix adopted a poison pill strategy to ward off a potential hostile takeover. Netflix adopted a stockholder rights plan designed to prevent activist shareholders from launching a hostile takeover.
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The plan would kick in if an individual or group tried to buy a sizable chunk of the company without approval from Netflix's board. If that happened, Netflix can use a technical maneuver to flood the market with new shares & make the takeover prohibitively expensive.
The defensive move was a direct response to notorious Hostile & Defensive Takeover Strategies corporate raider Carl Icahn, who bought 11/29/2012 a 10% stake in the
ORIENT-EXPRESS vs. TAJ

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TATA groups Indian Hotels Co. & a fund controlled by Montezemolo & Partners Spa made a bid of $1.86 Billion in October 2012 for US listed Orient Express Hotels Ltd. The friendly takeover was roughly of $12.63/share of Orient-Express. Orient Express rejected the bid terming it as Deeply unattractive from a financial perspective. In November, it was rumored that TATA may increase their share by $1.86 Billion.
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11/29/2012
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Mergers & Acquisitions:

DEFENSIVE & HOSTILE TAKEOVER STRATEGIES

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