Manual Hostile Takeover

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One of the more common defenses is the adoption of a so-called poison pill A defensive step taken by a board to thwart a takeover once the process has begun.

It can take the form of anything the target company does to make itself less valuable or less desirable as an acquisition. Poison pills can take many forms and refer to anything the target company does to make itself less valuable or less desirable as an acquisition. Some examples include the following:.

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Despite the seemingly obvious advantages, takeover defenses of all kinds lately have become the target of increasingly potent shareholder activism. The primary shareholder complaints against poison pills are that they entrench management and the board and discourage legitimate tender offers. Institutional Shareholder Services ISS; now part of RiskMetrics Group , an influential provider of proxy voting and corporate governance services, recommends that institutions vote in favor of shareholder proposals requesting that the company submit its poison pill or any future pills to a shareholder vote, or redeem poison pills already in existence.

Shareholder proposals requesting the company to submit its poison pill or any future pills to a shareholder vote, or to terminate an existing poison pill, are not binding on a board—even if overwhelmingly approved by the shareholders. However, if a company fails to implement a proposal approved by the shareholders, there likely will be significant negative consequences for the company and its incumbent directors, including the perception that the company is not responsive to the wishes of its shareholders, substantial withholding of votes in director elections, and downgraded corporate governance ratings.

Previous Section. Table of Contents. Next Section. Defense Mechanisms The management and directors of target firms may resist takeover attempts either to get a higher price for the firm or to protect their own self-interests. Golden parachutes are voted on by the board of directors and, depending on the laws of the state in which the company is incorporated, may require shareholder approval.

This makes it much more difficult for someone to conduct a takeover by buying enough stock for a controlling interest. A staggered board of directors drags out the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered, so that some members are elected every 2 years, while others are elected every 4 years.

Many companies that are interested in making an acquisition are not willing to wait 4 years for the board to turn over.

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Dual-class stock allows company owners to hold onto voting stock, while the company issues stock with little or no voting rights to the public. This allows investors to purchase stock, but they cannot purchase control of the company. Examples of convertible securities include convertible bonds, convertible preferred stock, and warrants. Some examples include the following: A legal challenge. The target company may file suit against the bidder alleging violations of antitrust or securities laws.

The people pill.

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High-level managers and other employees threaten that they will all leave the company if it is acquired. Also referred to as liability restructuring. With asset restructuring, the target purchases assets that the bidder does not want or that will create antitrust problems, or sells off the assets that the suitor desires to obtain.

Offensive and Defensive Strategies for Hostile Takeovers

The so-called Crown Jewel defense is an example. As a counter strategy, the Pac-Man defense works best when the companies are of similar size. Cons: This strategy requires substantial resources and is extremely costly for the organization and its shareholders. In the event of a merger or acquisition, a golden parachute contract guarantees substantial benefits for major executives of the target company who are let go as a result of the deal. These contracts can sometimes deter hostile bidders, but at the very least provide security for management.

Pros: Companies can combine this approach with other strategies to further discourage hostile buyers. As such, many companies will seek a friendly third-party company, often referred to as a white knight, to buy their assets. Once the hostile buyer drops the bid, the target company can buy its assets back from the strategically chosen third party. Cons: This is a high-risk defense. Without a white knight, the company will lose its most valuable assets. How to Navigate an International Business Environment.

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What is a Hostile Takeover

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The offensive strategies

Skip to main content. What qualifies as a hostile takeover of a company? Reasons for hostile takeovers Mergers and acquisitions are common endeavors for companies that want to expand their operations, gain new skills and resources, or reduce competition, as well as those receiving pressure from their shareholders to grow the business.

Benefits of hostile takeovers While the initial proposal may be unfavorable to the targeted company, hostile takeovers have the potential to improve stock prices for both acquirers and targets, according to the Financial Industry Regulatory Authority. Costs of hostile takeovers The downsides of acquisition include the risk of falling stocks and company value and the higher cost of a forced sale.

The offensive strategies There are two main strategies buyers can use to approach hostile takeovers: tender offer or proxy fight.

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Tender offer A tender offer occurs when the buyer offers to purchase shares at premium value. Cons: When successful, tender offers can be costly and time-consuming for investors.

Proxy fight Also known as a proxy vote or proxy contest, this strategy involves persuading shareholders to support the sale. Differential voting rights This preemptive defense strategy involves establishing stocks with differential voting rights, meaning shareholders have fewer voting rights than management.

How to Prevent a Hostile Takeover | Investment Bank

Cons: A decrease in voting rights may upset shareholders. Employee stock ownership program Another preemptive defense strategy is to create a tax-qualified plan that grants employees more substantial interest in the company. Pros: This strategy can increase employee loyalty and satisfaction.

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  • The Hostile Takeover!

Cons: Hostile buyers can still persuade shareholders in a proxy fight. Poison pill Likely the most famous defense against hostile takeovers, the poison pill strategy aims to make takeovers expensive enough to deter buyers. Pros: Turning the tables puts the original buyer in an unfavorable situation. Golden parachute In the event of a merger or acquisition, a golden parachute contract guarantees substantial benefits for major executives of the target company who are let go as a result of the deal.

Pros: The target company becomes a less attractive acquisition. Get Program Details. What is the reason for pursuing your MBA?