M&A

Question 1

Hostile Takeover

Answer 1

The acquisition of one company (called the target company) by another (called the acquirer) that is accomplished not by coming to an agreement with the target company’s management, but by going directly to the company’s shareholders or fighting to replace management in order to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight.

The key characteristic of a hostile takeover is that the target company’s management does not want the deal to go through. Sometimes a company’s management will defend against unwanted hostile takeovers by using several controversial strategies including the poison pill, crown-jewel defense, golden parachute, pac-man defense, and others.

Question 2

Poison Pill

Answer 2

A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills:

1. A “flip-in” allows existing shareholders (except the acquirer) to buy more shares at a discount.
2. A “flip-over” allows stockholders to buy the acquirer’s shares at a discounted price after the merger.
3. By purchasing more shares cheaply (flip-in), investors get instant profits and, more importantly, they dilute the shares held by the acquirer. This makes the takeover attempt more difficult and more expensive.
4. An example of a flip-over is when shareholders gain the right to purchase the stock of the acquirer on a two-for-one basis in any subsequent merger.

Question 3

Golden Parachute

Answer 3

Substantial benefits given to a top executive (or top executives) in the event that the company is taken over by another firm and the executive is 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 antitakeover measure taken by a firm to discourage an unwanted takeover attempt. Benefits include items such as stock options, cash bonuses, generous severance pay or any combination of these benefits.

Also known as “change-in-control benefits.”

Golden parachute clauses can be used to define the lucrative benefits that an employee would receive in the event he or she is terminated; however, the term often relates to terminations that result from a takeover or merger. The use of golden parachutes is controversial. Supporters believe that golden parachutes make it easier to hire and retain top executives, particularly in merger-prone industries.

In addition, proponents believe that these lucrative benefits packages allow executives to remain objective if the company is involved in a takeover or merger, and that they can discourage takeovers because of the costs associated with the golden parachute contracts.

Opponents of golden parachutes argue that executives are already well-compensated and should not be rewarded for being terminated. Opponents may further argue that executives have an inherent fiduciary responsibility to act in the best interest of the company, and, therefore, should not need additional financial incentive to remain objective and to act in the manner that best benefits the company. In addition, many people who disagree with golden parachutes cite that the associated costs are miniscule when compared to the takeover costs and, as a result, can have little to no impact on the outcome of the takeover attempt.

Question 4

Crown-Jewel Defense

Answer 4

A takeover-defense tactic that involves the sale of the target company’s prized and most coveted assets - the “crown jewels” - so as to reduce its attractiveness to the hostile bidder. The sale of a company’s best assets will leave it as a mere shadow of its former self. This is a type of “kamikaze” defense tactic, which inflicts potentially irreversible damage on a company to prevent it from being acquired by a hostile party.

A company can employ this crown jewels defense by creating anti-takeover clauses which compels the sale of their crown jewels if a hostile takeover occurs. This deters would be acquirers from attempting to take the firm over.

This tactic is sometimes used by conglomerates, which often attract hostile bidders because they can trade at a price below their break-up value due to the “conglomerate discount.” A potential pitfall of this tactic is that a quick sale of prized assets may fetch a price far below what they are actually worth.