Takeovers

Concept of takeover

Is a process wherein an acquirer takes over the

control of the target company

Another aspect to takeover is where an acquirer

acquires substantial quantity of shares or voting
rights of the target company.

Is termed as substantial acquisition of interest

Acquirer may be an individual, company, any

other legal entity or Persons Acting in Concert
with the acquirer

Are individuals or companies who act on

behalf of or in coordination with the acquirer
to acquire substantial number of shares in
the target company

Include holding company or subsidiary

company, mutual funds with its sponsor /
trustee / asset management company, etc.

May have a formal or informal agreement

with the acquirer in this regard
..

Very common in the United States and

in the United Kingdom
Very occasional and rare in Germany,
Japan or China.
The reason:
Germany practices dual board structure
Japanese companies have interlocking sets
of ownerships known as KEIRETSU and
In China most public listed companies are
state owned

Involves takeover of a financially sick company

by a financially rich company as per the
provisions of the Sick Industrial Companies

Objective behind this takeover is to bail out the

sick unit from losses

Is one where the acquirer acquires the shares

of the target by informing the board of
directors his intention to purchase the shares
of the target company

If board feels the offer is worth accepting, it

recommends to the shareholders that the offer
be accepted

The acquirer may either acquire the assets or

purchase the stock of the target

Allows acquirer to purchase only those assets

that it desires to purchase

Acquirer is not required to take over any

contingent liabilities of the target

Provides the acquirer with an opportunity to

negotiate the price with the board of directors.

Acquirer has to assume the liabilities of the

target firm

Target firm may continue to operate as an

autonomous subsidiary or it may be merged
with the acquiring firm

Approval of the shareholders of the target firm is

needed for this type of acquisition

One where the board of directors of the target

firm disagrees to the offer of the acquirer to
purchase the shares, but the acquirer continues
to pursue it or makes the offer by passing the
target companys management

Represents an offer made by the acquirer

without informing the target companys
management about their intention of acquiring
stake in the company.

Is an offer to buy the stock of the target firm

either directly from the shareholders or through
the secondary market

Acquirer intends to buy the company's stock to

the target firms board of directors

Proposal carries a clear indication that if the offer

is turned down a tender offer shall be resorted to

Strategy expensive as the price payable is higher

than the market price; also the stock price tends
to rise in anticipation of a takeover

Here, the acquirer approaches the shareholders

of the target firm with an objective of obtaining
the right to vote for their shares

Hopes to secure enough proxies that would help

in gaining control over the board of directors
and replace the incumbents management

Are a very expensive and difficult mode of

takeover for the incumbent management team
can use the target firm's funds to pay all the
costs of presenting their case and obtaining
votes

Involves purchasing enough stock from the

open market to bring about a change in
management.

Is a process where a company takes over

another company from the same industry

Basic objective is to attain economies of scale

and increase market share by entering into the
market segments of the company taken over

Is one where a company is taken over by any of

its vendors or customers

Can be of two types: backward and Forward

Backward is one where the business of the

vendor is taken over in order to reduce costs

Forward is one where the business of the

customer is taken over in order to access market
directly

Is one where a company takes over another

company from a totally different industry

Is pursued with the objective of attaining

diversification.

Is a takeover strategy where a private company

acquires a public company

Helps private company to effectively float itself and

at the same time bypass the lengthy and complex
process of going public by coming out with an IPO

Makes the company less susceptible to market

conditions

Public company is called SHELL as all that exists

of the original company is its organizational
structure.

Biggest problem is that the company comes

with some history, which can be bad, resulting
in sloppy record keeping, pending lawsuits and
contingent liabilities and some shareholders and
the resulting company has to live withthis
history

Helps the acquirer to attain increase in sales/ revenues

Helps acquirer to venture into new business segments and
markets with ease
Improves overall profitability of the entity
Helps the acquirer in increasing its market share
Reduces competition from the perspective of the acquiring
company
Reduces overcapacity in industry
Helps acquirer to expand the brand portfolio
Generates benefits of economies of scale
Helps attain increased efficiency as a result of corporate
synergies
Helps in eliminating jobs that overlap in responsibilities

Reduces competition and choice for

consumers

Results in job cuts

Cultural differences lead to conflict

Acquirer often burdened with hidden liabilities

of the target entity

Employees of the target company work in an

environment of fear and uncertainty affecting
motivational levels.

Bank-mail

A strategy where the bank of the target firm refuses

financing options to a firm that is keen on takeover.

Is done with the objective of preventing acquisition:

By depriving the merger through non availability of

finance
By increasing the transaction costs of the acquirer
By delaying the takeover and permitting the target
firm to develop other anti-takeover strategies.

Is a practice of purchasing enough shares of

another publicly traded company that poses a
threat of takeover for the target company

Threat of a takeover then forces the target firm

to buy those shares at a premium, in order to
avoid/suspend the takeover.

Is a strategy wherein a company facing a threat

of takeover sells off its most attractive assets to
a friendly third party or spins off its valuable
assets in a separate entity

Makes the target company less attractive for the

company planning a takeover, which then loses
interest and defers the takeover bid.

A strategy adopted to increase the likelihood of

negative results over positive ones for the company
attempting a takeover
Use of poison pills requires justification to be upheld
by courts adoption of poison pills in the best
interest of shareholders "business judgment rule
Derived from warfare terminology - Were pills laced
with poison that spies used to carry and would
consume when they would get discovered or
captured, in order to eliminate the possibility of
being interrogated for the enemy's gain

Represents an anti-takeover defense wherein the

current management team of the target company
threatens to quit en masse in the event of a
successful hostile takeover

Effectiveness depends on the circumstances of the

takeover - If the management team is efficient and
quits en masse, the acquirer would be left without
experienced leadership following a takeover. On
the other hand, if the current leadership is
inefficient he will get fired after the takeover
making the poison pill becomes ineffective

Is a situation where a target faces a hostile

takeover attempt from a company and is
struggling to avoid the same

At the moment another company makes a

friendly takeover offer to the target company in
order to help the target successfully avoid the
hostile takeover bid

Friendly takeover offer is to save the target from

the hostile attempt and the company making a
friendly offer called a white knight

Is similar to a white knight

Only difference is that a white squire exercises a

significant minority stake, as opposed to a
majority stake.

Does not have any intention of getting involved

in the takeover battle, but serves as a
figurehead in defense of a hostile takeover due
to the special voting rights it holds for its equity
stake holds in the company

Type of poison pill that the target company issues

against hostile takeover attempts

Plan implemented when the companys constitution

provides for shares that carry superior voting rights
compared to ordinary shares

When an unfriendly bidder acquires a substantial

voting stock, it may still not be able to exercise control
because the stock carrying superior voting rights will
help the company fight the hostile takeover bid
.

For Example:
Asarco had a voting pattern wherein holding
99% of the companys common stock would
give the holders only 16.5% of the voting
power

Is another strategy wherein the target company

issues large number of shares to a friendly party
at a price quite below the market price

Forces the acquiring company to purchase these

shares from the party to complete the takeover

Strategy discourages takeover by making the deal

more difficult and expensive as the corporate
raider is required to purchase shares from a party
that is friendly to the target company
..

Once takeover is averted the target company

may either buy back the issued shares or leave
them floating in the market

Defense mechanism against hostile

takeovers

Target firm employs tactics that might

threaten the target firms existence, so as to
thwart an imposing acquirers bids

Is known as Suicide Pill as it threatens the

very existence of the target

Represents an extreme version of poison pill.

Here the target company employs firms or

individuals to fend (defend yourself from an
attack) off a takeover bid as is either is unable
to do this on its own / does not want to be seen
doing so.

So employs other firms or individuals to do the

job for it

Is a strategy used to fend off a hostile acquisition

Here the target company adopts one of the two

possible strategies:

Borrow significant additional debt that facilitates

repurchase of stocks through a buyback program or
Distribute a liberal dividend among the current
shareholders

Leads to a sharp increase in the share price and

makes target less attractive as the acquirer has
to pay more for the target company minimizing
the gains for the acquirer

Is a form of poison pill that serves two purposes,

viz. an increase in the debt of the target making
the acquisition costly and maintains
shareholders interest in takeover attempts

Represents a strategy wherein an option is

granted by the seller to the buyer to purchase a
target companys stock as a prelude to a
takeover.

Acquirer requires a lock up agreement before

making a bid as it facilitates negotiation
progress - as a result of this arrangement, the
major or controlling shareholder gets effectively
"locked-up" and is not free to sell the stocks to a
party other than the potential buyer
.

Lock-ups can either be:

Soft - one that permits the shareholder to terminate the

agreement if a better offer comes along

Hard - one that is unconditional and cannot be

terminated

Stock lock-up Where the bidder is either allowed to

purchase the Authorized but Unissued Share Capital of the
controlling stockholder or the shares of one or more large
stockholders.

Asset lock-up/Crown Jewel Lock up where the target firm

grants an option for the acquisition of an asset.

May take any one of the following forms:

Break-up involving payment of termination fees

Giving an option to the target shareholders to buy

target stock

Giving rights to target shareholders to purchase target

assets

Forcing the vote provisions in merger agreements, and

Enforcing agreements with major shareholders viz.

voting agreements, agreements to sell shares, or
agreements to tender.

Is one where the boards of directors of the

target company just say no to the formal bid
made by the acquirer to the shareholders to
buy their shares.

Board has authority of refusing the company

making a takeover attempt and the matter ends
there.

Constitution of the company gives them this

authority.

The term refers to a catch-phrase coined by

former United States First Lady Nancy Reagan
advocating abstinence from recreational drug
use.

For Example:
A discussion of a takeover of the Walt Disney
Company by Comcast

Are shares that provide the shareholder with

very little or no voting rights on issues such as
election of the board or mergers

Issued to individuals who want to invest in the

companys profitability and success but are not
interested in voting rights

Preference shares are typically non-voting

shares.

Help in making the company a closely held act

as a takeover defense
.

For Example:
Warren Buffetts Berkshire Hathway Corporation
has two classes of shares viz. Class A shares that
are
voting stocks and Class B that are non-voting
shares.
The Class B stocks carry 1/200th of the voting
rights of
the Class A, but 1/30th of the dividends

Is commonly used to prevent a hostile takeover

Here the target company counters the takeover

bid by trying to acquire the bidders company i.e.
the target company makes a counter offer to
purchase the business of the acquiring company

Diverts the acquirer attention as the acquirer gets

busy in preventing the takeover of their own
company

For Example:

The 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. Bendix persuaded
Allied
Corporation to act as a "white knight," and the
company was sold to Allied the same year.

Companies often carry surplus cash in the

pension fund, which is put to use as and when
companies require resources

Is a type of poison pill strategy that prevents the

acquirer to go ahead with a hostile takeover by
utilizing the surplus cash in the pension fund for
financing the acquisition

Ensures through corporate governance practices

that resources in the pension fund account do
not get used for financing hostile takeover

The concept of pension parachute was evolved

by the law firm Kelley Dyer and Warren, which
they implemented for Union Carbide. The design
was upheld in Union Carbides litigation with
GAF Corporation. GAF Corporation subsequently
withdrew its hostile takeover bid, but profited
$81 million from sales of Union Carbide stock.

Is another defensive strategy adopted to ward

off a hostile takeover.

Here the management of the target company

threatens the acquirer that in the event of a
takeover, the entire management team will
resign.

This strategy is a variation of poison pill defense

strategy.

Is a strategy wherein the target creates barriers

outside its periphery to protect the company
from a takeover

Called lollipop defense as the company is

compared to lollipops that have a hard crunchy
exterior but a soft chewy centre i.e. the
takeover is made difficult by the barriers (hard
crunchy exterior) but the company in general is
an attractive takeover target (soft chewy centre)
..

Target company presumes that creating a

lollipop defense provides adequate security from
the takeover attempt

Fact is once the acquirer is able to overcome the

barriers (hard crunchy exterior), the target
stands exposed (soft chewy centre) and
takeover then becomes a matter of time

Is a strategy wherein the target issues a large

number of bonds in the market carrying a peculiar
condition i.e. if the company is taken over, the
bonds will have to be redeemed at a very high price.

High redemption price of the bonds acts as

deterrence and the acquirer may be forced to give
up the takeover bid

Called Macaroni defense for the target is facing a

danger of takeover and the redemption price of the
bonds starts expanding like Macaroni being cooked

Is one where the target firm issues a charter

preventing individuals with more than 10%
ownership of convertible securities such as
convertible bonds, convertible preference
shares, and warrants from transferring these
securities to voting stock

Charter becomes a barrier and hostile takeover

becomes difficult

Makes it becomes difficult for acquirer to exit

the bid as can neither acquire controlling stake
nor can it exit from the limited stake acquired

Shark repellent is a repellent applied by deep sea

divers to prevent sharks from attacking them The
target company makesspecial amendments to its
bylaws that become active only when a takeover
attempt is announced

Objective of the special amendments is to make

the takeover less attractive to the acquirer

In such a case, the acquirer is termed as the

shark and the proposed amendments are
repellents that prevent the shark from attacking
..

May not always be in the best interest of the

shareholders as may adversely affect the
financial health of the company

Strategies adopted include under shark

repellent
Poison pills
Scorched earth policy
Golden parachutes and
Safe harbor

Is a strategy wherein the bondholders and

stockholders are assigned a right whereby they
can demand redemption of stock before
maturity, at a value in excess of the par value
OR

Allows the shareholders to purchase the

companys shares at a very attractive fixed
price in case of restructuring of the company,
excess distribution of dividend

Helps the management of the company to deter

the takeover attempt by making the target very
costly for the acquirer

Strategy can work against the company too

during low liquidity bondholders can pressurize
the company to go into reorganization or to
increase the borrowing cost

The target company creates barriers making it

difficult for the acquirer to succeed in their
takeover attempt

Barriers work as if the target is safe in the

harbour and beyond the reach of the acquirer
(shark).

Concept originated as a military strategy

Involved a defence strategy wherein a retreating

army would burn crops and trees, so that there
would be no fresh supplies to the advancing army.

As an anti-defense strategy, scorched earth policy

involves liquidatingvaluable and desired assets
and assuming fresh liabilities

Makes proposed takeover becomes unattractive

to the acquiring firm

Represents the most valuable unit or

department of a company.

Categorized as crown jewels based on their

profitability, value of assets owned, and future
growth prospects

Target company creates anti-takeover clauses,

whereby the company gets the right to sell off
the crown jewels if a hostile takeover occurs

Implies inserting such a clause that imposes

additional financial burden on the acquirer in the
event of a takeover

Example:

Acquirer is required to pay for the offer within a

stipulated period. If the acquirer fails to pay the dues,
the shareholders of the target may grant extension,
subject to the acquirer agreeing to pay interest to the
shareholders for the delayed payment.
Where the acquirer refuses to pay the additional
amount, the agreement falls through and acquirer is
required to pay compensation

Acquirer is the loser in either case if the deals

fall through
Either pay the interest
Pay compensation

Creates financial burden on the acquirer

Is a defense wherein a certain percent of the

companys Director are replaced every year and not
the entire board being replaced annually

Makes it difficult for the acquirer to seize control over

the target, as the hostile bidder has to win more than
one proxy fight at successive shareholder meetings in
order to exercise control over the target

In order to facilitate staggering Directors are

classified into group or class and each group required
to vacate their post by rotation
.

Institutional shareholders in US have been

increasingly calling for an end to
staggering / declassifying boards of
directors so that the practice of retiring by
rotation comes to an end

Reason - All desirable names drop from the

list of the directors affecting investors
confidence.

Here an unfriendly bidder agrees to limit his

holdings of a target firm

Made possible by the target firms willingness to

purchase the potential acquirers (raiders) shares
at a premium price

Enacts a standstill or eliminates chances of a

takeover attempt by the potential raider

Gives the target company time to build up other

takeover defences ...........

Can also take another form - wherein two or

more parties agree not to deal with other parties
in a particular matter for a specified period of
time For Example: An agreement not to go
ahead with an acquisition of other parties

Allows the concerned parties to devote more

time for negotiation, due diligence, and details
of a potential acquisition/defense they are
currently working on

The target firm purchases back its own shares from

an unfriendly bidder at a price well above market
value

Numbers of shares re-purchased help target firm to

regain controlling interest in the company by
having adequate shareholders votes to prevent the
hostile acquisition

Targeted repurchase considered a success if the

strategy results in abandonment of the takeover
attempt ..

Not necessary that the raider company may accept

the price offered

Here the raider continues with its attempt of hostile

takeover and the target generally combines the
targeted repurchase offer with another strategy

For Example: Setting up a holding company that

receives all acquired shares and starting the
process of converting the same into employee
stock ownership plan (ESOPs)
..

Defeats the very objective of pursuing a hostile

takeover as raider left with no other option but
to accept a market price for the shares under
their control

Refusal to accept this generates risk of the

shares becoming worthless, once ESOP is
approved by the regulatory authorities

Is a type of stock repurchase program

Here shares are repurchased from the existing

shareholders of the company

Buyback results in immediate reduction of the

voting power of the shareholders

Shareholders may however subsequently

increase their holdings through additional
purchases which is called a top-up
...........

For Example:

Company X holds 10% shares in a company, which

implies that it has 10% voting power too. Company
Y offers to purchase 5% of the shares from
Company X with the latters consent. This purchase
also reduces the voting power of Company X to 5%.
If at a later date, Company X wants to increase its
voting rights to say 8%, it can purchase 3% shares
form the open market. This 3% purchase is called
top up.

Advantage of top up strategy is that it provides

the target company with time for enhancing and
strengthening its takeover defense mechanism

Also known as reacquired stock

Are shares/stock bought back by the issuing

company with the objective of reducing the
amount of outstanding stock in the open market

Is a tax-efficient tool of giving cash to

shareholders instead of dividend

Strategy adopted by companies to protect the

company against a takeover threat
.

Shares repurchased either cancelled or held for

reissue

Knows as Treasury shares/stock when not sold

Have the following characteristics:

Do not involve payment of any dividend
Have no voting rights
Should not exceed the maximum proportion of total
capitalization specified by relevant legal provisions
Possession of shares does not give the company
the right to vote, rights of a shareholder, receive
dividends, or to receive any part of the assets on
liquidation

Thank you!