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SHARK REPELLENT Strategy taken up by public companies to ward off unwanted takeovers Measures taken by the management of a firm to discourage unwanted or hostile takeovers
GREENMAIL • Combination of greenbacks which means dollars and blackmail. • Premium is paid to purchase its own stock shares back from a corporate raider • Pay a premium over what is paid when accumulating the Co stock • STEPS TO COMMITTING GREENMAIL: • Raider acquires a large stake by purchasing shares of the target company from the open market. • The raider threatens a hostile takeover but also offers to sell the shares back at a premium price. • The target company uses the shareholders money to pay the ransom. • The value of the company is reduced and the raider gets a significant amount of profit. • The Internal Revenue Service set an excise tax of 50% on any profits by Greenmail. • 2000-Arun Bajoria raid on Bombay Dyeing
CASES OF GREENMAIL • GOODYEAR (1986) • Sir James Goldsmith purchased an 11.5% stake at $42 a share. • He filed with the Security and exchange commission for financing a takeover and as a part of the plan sell off all assets except the tire business. • Agreement to sell his stake back for $49.50 a share. Good year forced to repurchase 40 mn shares from shareholders which cost them $2.9 billion • GESCO AND AH DALMIA GROUP (2001) • AH Dalmia group made a hostile bid for a 45 per cent stake at Rs. 27 a share . • AH Dalmia in the end sold out its 10.5 per cent stake at Rs. 54 per share for a total of Rs. 16.35 crores • Consisted of 30 lakh Gesco shares which was acquired earlier at an average cost of Rs. 24 per share for a total of Rs. 7.20 crores.
BENEFITS : MEANING : • First of all, no company can function if there is a conflict of interest at the key management level. While certain takeovers are hostile, some of them can even be beneficial for the company’s future and growth. If the key personnel become insecure about their job, they may try to cause hindrances in the merger or takeover process. On the other hand, with Golden Parachute, employees can be secured about their compensation and offer complete co-operation the merger procedures. • Once the terms of Severance package is laid out, the exit of white collar executives becomes more cordial. Things go in accordance with a pre-determined agreement and there is no bad blood. This also protects a company from being maligned by its key personnel in the event of termination due to merger. • The possibilities of hostile takeovers are reduced with the clause of Golden Parachutes being included in the contract. The acquiring company might not find it appealing to shed such an expensive package if it plans to ouster the key employees already in control. Sec 202 Indian Co Act 2013-A golden parachute consists of substantial benefits given to top executives if the company is taken over by another firm and the executives are terminated as a result of the merger or takeover. Golden parachutes are contracts given to key executives and can be used as a type of anti-takeover measure, taken by a firm to discourage an unwanted takeover attempt. Benefits may include stock options, cash bonuses and generous severance pay. TOP 10 GOLDEN PARACHUTE
CONTROVERSY AND OPPOSITION EXAMPLES : • The quantum of the package is mammoth, which leads other employees entitled to receive a generic severance package to feel as deprived, neglected and less-privileged. This kind of dissatisfaction amongst existing employees form a hindrance to smooth functioning of a company. • Many a times, the top-level executives underperform or do something unethical, due to which they may end up losing their jobs. Many companies offering the Golden Parachute are silent on these aspects, and the clause ends up being an incentive to erring managers who are terminated. Needless to say, shareholders and employees will not feel good about it. E.g.: Tony Hayward, the Chief Executive officer for British Petroleum, was terminated due to the perceived lack of leadership during the infamous oil spill that tarnished his tenure. However, he is reported to have walked away with severance package of more than a million dollars and an eight-digit pension amount. • Critics feel that it is the responsibility of the management to act in the best interest of the company. If a white-collar executive loses his job because of a friendly merger, there is no need for the company to compensate them in addition to their already fat package. • Another logic against the Golden Parachute is that if the acquirer has deep pockets, the compensation cost may be a trivial amount for him. Hence, the idea of using Golden Parachute as anti-takeover mechanism is rendered futile. • James Kilt, CEO of the Gillette Company, collected $165 million when his position became non-existent after Procter & Gamble acquired Gillette in 2005. • Also, in 2005, Carly Fiorina, CEO of Hewlett-Packard, received $40 million. • Michael Eisner, CEO of the Walt Disney Company, received more than $1 billion when they both resigned after being asked to step down.
PAC-MAN DEFENSE Meaning The Pac-Man defence is a defensive tactic used by a targeted firm in a hostile takeover situation. In a Pac-Man defence, the target firm then tries to acquire the company that has made the hostile takeover attempt. In an attempt to scare off the would-be acquirers, the takeover target may use any method to acquire the other company, including dipping into its war chest for cash to buy a majority stake in the other company. {Aggressive + Risk Taking |} War Chest A company’s war chest is the buffer of cash kept aside for uncertain adverse events, such as taking over a company. A war chest is typically invested in liquid assets such as Treasury bills and bank deposits that are available on demand. Disadvantages of the Pac-Man Defence The Pac-Man defence is an expensive strategy that may increase debts for the target company. Shareholders may suffer losses or lower dividends in future years. Pac-Man Game Strategy In the Pac-Man game, the player has several ghosts chasing and trying to eliminate it. If the player eats a power pellet, he may turn around and eat the ghosts. Companies may use a similar approach as a means of avoiding a hostile takeover. During the acquiring phase, the takeover company begins a large-scale purchase of the target company’s stocks for gaining control of the target company. As a counter-strategy, the target company may begin buying back its shares and purchasing shares of the takeover company.
Examples • In 1982, Bendix Corporation attempted to overtake Martin Marietta by purchasing a controlling amount of its stocks. Bendix Corporation became the owner of the company on paper. However, Martin Marietta’s management reacted by selling off its chemical, cement and aluminium divisions and borrowing over $1 billion to counter the acquisition. The conflict resulted in Allied Corporation acquiring Bendix Corporation. • In February 1988, after a month-long takeover fight that began when E-IIHoldings Inc. made an offer for American Brands Inc., American Brands bought E-II for $2.7 billion. American Brands financed the merger through existing lines of credit and a private placement of commercial paper. • In October 2013, Jos. A. Bank launched a bid to take over Men’s Wearhouse. Men’s Wearhouse rejected the bid and countered with its own offers. During negotiations, Jos. A. Bank bought Eddie Bauer to gain more control in the marketplace. Men’s Wearhouse ended up buying Jos. A. Bank for $1.8 billion.
POISON PILL A “Poison Pill” is a popular defense mechanism for a “target company” wherein it uses shareholder’s right issue as a tactic to make the hostile acquisition deal expensive or less attractive for the raiders. Exercise special rights only after a period of time TOOLS • Preferred Stock Plans: Dilutes the ownership of the acquiring company as well as increases the cost of the merger • Flip-Over Plans: Allows shareholders to purchase shares of common stock in the new company at a substantial discount after the merger • Flip-In Plans: Right to purchase additional stock in the target company at substantial discounts • Back-End Plans: Right to cash or debt securities at a price established by the company's Board of Directors • Poison Puts: A bond that allows investors to cash in the security before it matures • Golden Handcuffs: Issued in the form of deferred compensation, employee stock options (ESOPs) or restricted stock which can be earned after the employee reaches a particular performance threshold • Voting Plans: When a substantial block of shares is obtained by an investor, preference shareholders (apart from than the large block holder) become authorized to super voting rights. This makes it difficult and unattractive to obtain voting control by the bulk share purchaser
POISON PILL • NETFLIX POISON PILL EXAMPLE • Carl Icahn, an institutional investor, caught Netflix off-guard in 2012 by acquiring 10% stake in the company. • Netflix responded by issuing a shareholder’s right plan as a “Poison Pill”, a move which irked Carl Icahn to no end. • A year later, he cut his holding to 4.5% and Netflix terminated its right issue plan in December 2013 • MICRON TECH POISON PILL EXAMPLE • The Board of Director of Micron Technology Inc., the largest US memory chipmaker, adopted a “Poison Pill” strategy. • The tactic was rights issue that would be triggered if an individual or group acquires 4.99% or more of the company’s outstanding stock • PIER 1 IMPORTS POISON PILL EXAMPLE • In September 2016, Pier 1 Imports Inc, resorted to Poison Pill measure when hedge fund firm Alden Global Capital LLC disclosed a 9.5% stake in the former. • The agreement entitled every common stockholder the right to buy a fraction of junior preferred stock at the price of $17.50. • Thus, diluting the control of any shareholder capturing a big stake. • GAIN CAPITAL POISON PILL EXAMPLE • FXCM Inc planned to acquire GAIN Capital Holdings, Inc. in April 2013. GAIN responded by triggering a “poison pill”. • Rights were decided to be distributed as a divided to the common shares at the rate of one-for-one of the company held by stockholders upon occurrence of an unforeseen event.
CROWN JEWEL A crown jewel refers to a company's most prized or valuable asset in terms of its profitability and future prospects. Whatever it is, these prized assets can make a firm an attractive potential target for a hostile takeover. However, the firm can use its crown jewels to ward off such attempts by selling them to a friendly third party. Alternatively, it may spin off its valuable assets into a separate entity. This makes acquisition more expensive and less attractive. • Selling of crown jewels preserves Merckle empire: • Merckle’s industrial empire crumbled under a heavy debt load and losses from financial bets in late 2008. • Ludwig Merckle, Adolf’s sole heir, has given up the family empire’s crown jewel. It was done by selling the generic drug maker Ratiopharm to Israel’s Teva. • Unsuccessful attempt by Arcelor: • Dofasco was a consistently profitable and efficient producer- a crown jewel of Arcelor. Mittal had planned to partly finance the acquisition by selling Dofasco to ThyssenKrupp. • So, as a defensive move by Arcelor- the Dutch foundation that holds the shares of Dofasco, decided not to dissolve the foundation, which would have permitted the sale. But the strategy failed, and Mittal acquired Arcelor in June for 26.8 billion euros ($33.53 billion).
WHITE KNIGHT WHITE KNIGHT • A white knight is a company that acquires another company that is trying to avoid acquisition by a third party. Target Co seeks a friendly party for acquiring the business • White knights are white because they are associated with goodness and virtue • There is a risk that when the white knight enters the scene, a bidding war arises Example – • Sid Bass and sons purchased a sizable interest in Walt Disney Productions in order to prevent Saul Steinberg’s hostile bid for the mass media and Entertainment Company (1984) • Fiat S.p.A. acquired Chrysler, saving the struggling American automaker from liquidation. The two car manufacturers eventually merged into Fiat Chrysler Automobiles, a new entity (2009)
WHITE SQUIRE • A white squire defense is where a friendly company or investor purchases a large enough share of the target company to stop an unwelcome bidder from achieving its aim of taking over the target company. Once that unwelcome bidder has withdrawn its bid, the white squire will then typically sell its shares • A white squire defense helps a company fend off a hostile takeover, but has no intention of taking over the company itself. • There is a risk that over time, the white squire may get unhappy with the current management and can switch allegiances. Example: • In 2005, Shareholders United, a white squire stop Malcolm Glazer's bid to take over Manchester United FC fully by purchasing approximately 8% of the outstanding shares • Reliance is white squire to Oberoi Hotels against EIH
SANDBAG Sandbag is one of the many anti-takeover defense mechanisms that can be adopted by corporations in the case of an acquisition bid. In most cases, the acquiring company is not favorable to the target company and hence the target company will resort to any anti-takeover defense mechanisms to discourage the bidding company. Sandbag takeover defense involves being in prolonged discussions with the unwelcome bidder and delaying this process as long as possible in hope that a white knight will surface up protecting them from the unwelcome bidder. In case of Corporate finance, it refers to the tactic employed a company while releasing its Quarterly/Annual results and earnings guidance in such a way that its stock price appreciates. The company will report their guidance forecasts for next quarter/financial year less than what they actually predict according to the present market condition so that when the next period earnings results is released, it will exceed the expectations when in fact it has not actually exceeded. This will shore up the stock price of the company which will lead the security being overpriced.
MACRONI DEFENSE • The target firm issues huge number of bonds with a condition that they must be redeemed at a very high price in case the control of the firm changes. • Burden for the acquiring firm hence not economically fruitful. • As macaroni kept in a pot which expands when things get really hot, the redemption value of the bonds in the case of acquisition is very high that it increases the cost of acquisition. Example: • Company X is trying to acquire company Y • X issues bonds worth $50 million which can be redeemed at 200% of its face value. • An investor who invested $1000 will have to be paid $2000 which will double the cost of acquisition, hence discouraged.
STAGGERED BOARDS • Companies with staggered board do not reelect all the board members annually • Entire group of board members cannot be replaced on one annual meeting. • Effective protection as defense establishes a large delay. • Increases the companies’ likely hood of remaining independent 9-months BUT • Average shareholders would get 8-10 per cent less in acquisition premium. • Very effective in combination with other defense measures Example: • Approximately 60 per cent of the U.S corporations and almost one-half of the Standard & Poors 500 firms list have adopted a staggered board. • According to a Harvard Study more than 70% of all companies that went public in 2001 had staggered boards. • Percentage of Standard & Poor's 1,500 companies with staggered boards has dropped to 40.6% from 57.1% in 2005, McDonald's Corp. and Navistar phased out staggered board terms.
