In the world of corporate mergers and acquisitions (M&A), companies sometimes face hostile takeovers, situations where an acquiring firm attempts to take control of a target company against the wishes of its management. To prevent such takeovers, target companies often implement anti-takeover defenses. These strategies make it more difficult or less attractive for a hostile bidder to gain control.
Types of Anti-Takeover Defenses
Anti-takeover defenses can be broadly classified into two categories: pre-offer defenses and post-offer defenses.
Pre-Offer Defenses
These are measures a company puts in place before any takeover attempt is made:
- Poison Pill (Shareholder Rights Plan)
- One of the most well-known anti-takeover strategies, a poison pill gives existing shareholders the right to buy additional shares at a discounted price if an acquirer buys a certain percentage of the company. This dilutes the value of shares and makes the takeover more expensive.
- Staggered Board of Directors
- In a staggered board, only a fraction of directors are up for election in a given year, making it difficult for an acquirer to gain control of the board quickly.
- Golden Parachutes
- These are lucrative severance packages for top executives if they are removed after a takeover. This increases the cost of acquiring the company, discouraging hostile bids.
- Supermajority Voting Requirements
- A company may require an extremely high percentage (e.g., 75% or more) of shareholder votes to approve a merger or acquisition, making it hard for an acquirer to secure approval.
- Dual-Class Stock Structure
- Some companies issue multiple classes of shares with different voting rights. Founders and key executives often hold shares with superior voting power, allowing them to maintain control even if other shareholders sell their stock.
Post-Offer Defenses
These measures are taken after a takeover attempt has been initiated:
- White Knight Strategy
- The target company seeks out a friendly company (a “white knight”) to acquire it instead of the hostile bidder.
- Pac-Man Defense
- The target company counters by attempting to acquire the hostile bidder itself, turning the tables on the aggressor.
- Greenmail
- The target company buys back its shares at a premium from the hostile bidder to prevent the takeover.
- Crown Jewel Defense
- The company sells or spins off its most valuable assets to make itself less attractive to the acquirer.
- Litigation
- The target company may sue the acquiring firm to delay or block the takeover.
Effectiveness and Ethical Considerations
Anti-takeover defenses can be effective in preventing hostile takeovers, but they are sometimes criticized for protecting ineffective management at the expense of shareholder value. Some investors believe that these strategies reduce the market’s ability to discipline poor-performing companies. However, when used wisely, they can help companies negotiate better deals or remain independent if that is in the best interest of stakeholders.
Conclusion
Anti-takeover defenses play a crucial role in M&A strategy, helping companies protect themselves from unwanted acquisitions. Understanding these defenses is essential for business leaders, investors, and regulators as they navigate the complex world of corporate control and governance.