11 Tricks to Defend Against a Hostile Takeover

Corporate raiders may not plunder and pillage like their medieval counterparts, but the upheaval they cause is just as real. Any business with attractive cash flows and a healthy balance sheet can be the target of a hostile
takeover. These 11 tactics help defend against unwanted acquisitions.

 

Before the Takeover: Scorched Earth Strategies

 

Take on more debt. Weighing the balance sheet down with a large amount of debt can discourage hostile takeovers. The potential owners worry about repaying
the debt burden and still making a profit.

 

Acquire a company. Making an acquisition can dilute a corporate raider’s shares and, at the same
time, increase efficiencies and revenues over the long term.

 

Set up golden parachutes. Writing certain termination benefits into executive contracts may make an acquisition too expensive. Raiders who wanted to
dismiss the existing management team would need to pay out millions in severance pay, bonuses and stock options.

 

Set up differential voting rights. By giving one class of stock fewer voting rights than another class, businesses can ward off takeovers and still remain
attractive to investors. One class provides greater voting rights while another delivers better dividends.

 

Trigger limited voting rights. Under this plan, stockholders who own more than one-fifth of a company cannot vote on a takeover bid. In addition, the
presence of a potential acquirer triggers super-majority voting, which means that 80 percent of stockholders must approve any merger attempt.

 

Give shareholders buying rights. After a potential takeover has been announced, existing shareholders can purchase more shares at a discount. The purchases
limit a raider’s ability to win over a merger majority and make an unwanted takeover virtually impossible.

 

Encourage employee stock ownership. In addition to receiving tax benefits, corporations with employee stock ownership plans, ESOPs, have a better chance of
convincing shareholders and employees to side with management instead of with a corporate raider.

 

Spread shares across subsidiaries. Under a cross-shareholding strategy, the parent company owns 100 percent share capital in each of three subsidiaries.
The parent transfers valuable assets to the subsidiaries, and the subsidiaries issue more stock to the public and to one another. In the end, the parent
does not hold majority ownership of any subsidiary, making it a worthless target for takeover.

 

After the Takeover: Poison Pill Tactics

 

Issue propaganda statements. The goal of this tactic is to win the hearts of the people and effectively limit some of the dubious tactics that can occur
during a takeover attempt. The targeted company lets the public know how damaging a merger would be for a certain area of the country or for a certain
segment of the population. The company uses mass media to play the role of a helpless victim.

 

Locate a White Knight. Under this scenario, the company works with an ally, or White Knight, to rush in and save the takeover target. The White Knight
agrees to purchase the company for an amount greater than the raider, or Black Knight, is willing to pay. The company is then restructured according to the
existing management team’s wishes.

 

Follow a Pac-Man defense. At certain points in the classic video game, Pac-Man could turn on the
chasing ghosts and chomp them. In similar fashion, a corporation can use the Pac-Man strategy to turn on the acquirer and put forth its own takeover bid,
with or without the help of a White Knight.

 

Companies can come under the scrutiny of corporate raiders for any number of reasons. By taking action before and after a merger attempt, businesses can
maintain their independence and send invaders away empty-handed.

Friday, May 2nd, 2014 Uncategorized

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