Defensive mergers and acquisition Flashcards
The Chief Financial Officer’s suggestion appears to be a disposal of ‘crown jewels’ i.e. without the cash reserves, Nibbly may become less valuable to Famished.
Also, the reason for the depressed share price may be because Nibbly’s shareholders do not agree with the policy to retain large cash reserves. Therefore returning the cash reserves to the shareholders may lead to an increase in the share price and make a bid from Famished more unlikely.
However, Nibbly must investigate further whether the reason for a possible bid from Famished might be to gain access to the large amount of cash or it might have other reasons.
Nibbly should also try to establish whether remitting the cash to the shareholders would be viewed positively by them.
Whether this is a viable option for Nibbly depends on the bid for Tasty. If the cash is remitted, a further R20mil debt would be needed (as stated in question).
Increased gearing may have significant implications on Nibbly’s future investment plans and may result in increased restrictive covenants.
Ultimately gearing might have to increase to such a level that this method of financing might not be possible.
Other possible defences (proactive measures):
Sell valuable assets so as to make Nibbly less attractive to Famished.
Amend management contracts so that large bonuses are payable should Nibbly management be retrenched.
A complicated pyramid structure can be created in order to make the acquisition of Nibbly’s operations more challenging.
Create a poison pill (an event that comes into force if Nibbly is taken over) e.g. issue convertible debentures which will only convert if control changes.
Legally amending the memorandum of incorporation in order to make it difficult for Famished to acquire control.
Perform a share split so that shares can potentially be more widely held and make it more difficult to acquire control.
Improve Nibbly’s operating performance to make shareholders more loyal and less willing to sell their shares.
