Takeover - Various takeover Strategies & How to defend a Takeover Bid

Meaning, Various strategy, How to defend & Bottomline

Nov 12, 2022

What Is a Takeover?

A takeover occurs when one company makes a successful bid to assume control of or acquire another. Takeovers can be done by purchasing a majority stake in the target firm. Takeovers are also commonly done through the merger and acquisition process. In a takeover, the company making the bid is the acquirer and the company it wishes to take control of is called the target.

Various takeover Strategies

Tender Offer: Tender offer is a corporate finance term denoting a type of takeover bid. The tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corporation (the target corporation) to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares. In a tender offer, the bidder contacts shareholders directly; the directors of the company may or may not have endorsed the tender offer proposal. To induce the shareholders of the target company to sell, the acquirer's offer price usually includes a premium over the current market price of the target company's shares.
Street Sweep: In street sweep the larger number of target company’s shares are quickly purchased by the acquiring company before it makes an open offer. Thus, anyhow Target Company has to accept the offer of the takeover made by the acquiring company. It is also known as market sweep.
Bear Hug: A buyout offer so favorable to stockholders of a company targeted for acquisition that there is little likelihood they will refuse the offer. Not only does a bear hug offer a price significantly above the market price of the target company's stock, but it is likely to offer cash payments as well.
Strategic Alliance: SA is a kind of partnership between two entities in which they take advantage of each other’s core strengths like proprietary processes, intellectual capital, research, market penetration, manufacturing and/or distribution capabilities etc. They share their core strengths with each other. They will have an open-door relationship with another entity and will mostly retain control. The length of the agreement could have a sunset date or could be open-ended with regular performance reviews. However, they simply would want to work with the other organizations on a contractual basis, and not as a legal partnership. Example: HP and Oracle had a strategic alliance wherein HP recommended Oracle as the perfect database for their servers by optimizing their servers as per Oracle and Oracle also did the same.
Brand Power: This refers to entering into an alliance with powerful brands to displace the target’s brands and as a result, buyout the weakened company.

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How to defend a Takeover Bid (Antitakeover strategy)?

Takeover defenses include actions by managers to resist having their firms acquired by other companies. There are several methods to defend a takeover.

Crown Jewel Defense: The target company has the right to sell off the entire or some of the company’s most valuable assets when facing a hostile bid in the hope to make the company less attractive in the eyes of the acquiring company and to force a drawback of the bid.
Poison Pill: Poison pill can be described as shareholders' rights, preferred rights, stock warrants, stock options which the target company offers and issues to its shareholders. The logic behind the pill is to dilute the targeting company’s stock in the company so much that bidder never manages to achieve an important part of the company without the consensus of the board.
Poison Put: Here the company issue bonds which will encourage the holder of the bonds to cash in at higher prices which will result in Target Company being less attractive.
Greenmail: Where the bidders are interested in short term profit rather than long term corporate control then the effective strategy will be to use Greenmail also known as Goodbye Kiss. Greenmail involves repurchasing a block of shares which is held by a single shareholder or other shareholders at a premium over the stock price in return for an agreement called as standstill agreement. In this agreement it is stated that bidder will no longer be able to buy more shares for a period of time often longer than five years.
White Knight: The target company seeks for a friendly company which can acquire majority stake in the company and is therefore called a white knight. The intention of the white knight is to ensure that the company does not lose its management. In the hostile takeover there are lots of chances that the acquired changes the management.
White squire: A different variation of white knight is white squire. Instead of acquiring the majority stake in the target company white squire acquires a smaller portion, but enough to hinder the hostile bidder from acquiring majority stake and thereby fending off an attack.
Golden Parachutes: A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. This will discourage the bidders and hostile takeover can be avoided.
Pac-man defense: The target company itself makes a counter bid for the Acquirer Company and let the acquirer company defense itself which will call off the proposal of takeover.