Thursday, April 5, 2012

Takeover Defenses

Mergers and Acquisitions Revision Article Series

Some of the takeover defenses employed by corporate managers and principal shareholders to prevent takeovers.
Golden parachutes


They are separation provisions of an employment contract for senior managers that compensate them for the loss of their jobs under change of control of the company. The provision calls for a lump-sum payment or payment in installments. These payments will be substantial compared to the annual compensation of these senior managers. Hence the company who is acquiring has to make these payments in addition to the payments it has offered to shareholders. This additional payment to senior managers is considered as a deterrent by some corporate owners and managers. But the empirical evidence brings out the fact that golden parachute payments generally amount to one percent of acquisition cost and it does not make a difference to acquisition decisions.


Poison puts


As the bond holders suffered due to leveraged buy outs of companies, poison put covenants were brought into existence. If a takeover occurs and the bond price falls below par, the bond holders have a right to demand payment of par value of their bonds. Some bond agreements limit the amount of new debt taken on either by an acquirer or by management itself in an MBO. This protection measure for bond holders is viewed as a takeover defense by some.


Antitakeover amendments or clauses


Antitakeover clauses in a firm’s charter amendments to it are called shark repellents. There are four major types of clauses.


1. Supermajority clause: These clauses require shareholder approval by at least two thirds vote and sometimes as much as 90 percent of the voting power of outstanding capital stock for transactions involving change of control. Because of this provision, an acquirer cannot control the target even after acquiring 51 per cent stock because he cannot change the board.


2. Fair-Price Clause: In this clause a fair price is specified as some multiplier of book value or accounting earnings in good periods. Only if the acquirer offers a bid price higher than the fair price, supermajority clause is waived. This provision protects the company from becoming a target when its shares are undervalued due to some recent poor performance. Even if some shareholders want to sell at a lower price and exit, they cannot do so, because acquirer will not get control of the company.


3.  Classified board: In this board structure, only some directors retire every year. Hence, the acquirer has to wait for two or three annual meetings gain control of board.


4. Authorization of preferred stock: Under this clause, board is authorized to create a new class of securities with special voting rights. Under a takeover thread, the board may invite some other persons to join them by offering this new class of securities or they can be offered to some of the board members and they can increase their shareholding and prevent a takeover threat.



Poison pill
Under this pill, shareholders receive a common stock dividend in the form of rights to acquire the firm’s common stock at an exercise price well above the current market price. In the case of takeover attempt, these rights flip over and the shareholders are entitled to buy the acquirer’s shares at a discount. Hence the acquirer has to pay for the existing equity and in addition he has to pay for these rights.


Purchase of shares from a large block holder with a standstill agreement so that the shareholder does not acquire the shares of the company once again in a specified period.
Original knol - 30

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