Firm Combinations Flashcards
Arcelor-Mittal case:
Explain the Pac-Man defense.
(counterattacking by buying out the company attempting to take over your company)
Arcelor- Mittal
Why was Arcelor unable to enact Pac-Man Defense when under threat of takeover by Mittal?
- lack of a ‘shared strategic vision, business model, or shared values,
- overvalued and small free-floating percentage did not seem advantageous to Arcelor
- international involvement of foreign governments in the ownership of companies further complicates things in Europe
Arcelor resorted to a nonstandard defense described in the case as “locking up the crown jewels.” What did this defense consist of? Is it widely available to firms?
Entitle to Cash Flows, but not voting rights (for next 5 years).
Posion Pill Defense
- As soon as any shareholder reaches an ownership threshold of X%, all other shareholders are granted Y share per every share they own
- Can render hostile takeover very expensive
- In practice, only triggered once to the best of my knowledge (look up “Selectica”)
- can always be voluntarily waived if the price is right (and management is not entrenched
Special Dividend or Share Repurchase Defense
- One-time special dividends reduce cash → increase effective leverage irreversibly.
- Now it becomes harder to finance a takeover with debt because the debt capacity of the merged enterprise is reduced.
- Share repurchases can be effective defense in multiple ways
- Increase leverage I
- By purchasing shares on the open market, reduce the amount of free-floating shares the contender can buy to accumulate a position I
- Provides a competing offer vs. the contender’s I
- Uses the target’s cash instead of incumbent shareholders’
Staggered Board Defense
Every director serves a three-year term and terms are staggered so that only one-third of the directors are up for election each year. (Bidders only able to control minority of target board)
Most EFFECTIVE COMBINED WITH POISON PILL
