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Defense Strategies Of Hostile Takeovers

Introduction to Takeovers:
You may have heard about a company merging or taking over another company by simply making a move on the share market. The company which acquires another company is known as the acquirer. On the other hand, the company which is being acquired is known as the acquire.

When the acquirer makes moves on the share market with the objective of getting the highest percentage of shares and therefore getting the voting rights of the target company. This process is known as Takeover.

Some examples of takeovers in the year 2020 are as follows:
  1. Infosys and Kaleidoscope Innovation
  2. Reliance Retail and Future Group's Retail Business
  3. Zomato and Uber Eats
  4. LIC and IDBI bank
  5. Disney and 21st Century Fox
As of August 2022, the largest ever acquisition was the 1999 takeover of Mannesmann by Vodafone Airtouch plc at $183 billion ($297.7 billion adjusted for inflation).

Types of Takeovers:

Basically there are 4 types of takeovers in the mergers & acquisition of companies
  • Friendly takeovers:
    These types of takeovers are done only by the prior approval of the target company. In simple words, it means that if the target company agrees with the takeover, the board of directors approval is needed in case of friendly takeovers.
  • Hostile takeovers:
    If the takeover is unfriendly in nature or no consent of the board of directors of the target company is taken, it is known as hostile takeover. In the case of hostile takeover, the management disagrees with the merger or acquisition but they don't have any other option left. Forceful takeovers are also termed as Hostile takeovers.
  • Reverse takeovers:
    When a private corporation buys a publicly traded company, it is called a reverse takeover. The primary goal of reverse takeovers is to get listing status without conducting an IPO (IPO). In a reverse takeover offer, the private purchasing business effectively acquires an existing publicly traded company in order to go public.

    If the acquirer decides that conducting a reverse takeover offer is preferable to registering for an IPO, it may do so. Being listed is a time-consuming, expensive procedure that involves a lot of documentation. To avoid loss of time, expenses and documentation, the private listed company goes for reverse takeovers.
  • Backflip takeover:
    When the buyer becomes a subsidiary of the target business, a backflip takeover offer takes place. The target firm survives the acquisition, and the acquiring business becomes a subsidiary of the combined company, earning the term "backflip" for the takeover. A backflip takeover offer frequently has the goal of allowing the acquiring business to benefit from the target's superior market position or higher brand awareness.

What Are The Defense Strategies For Hostile Takeovers:

Every company fears that at any given point of weakness, their company can be taken over by a large syndicate of industry. To safeguard themselves, the target companies hire professionals to seek advice on how to avoid these hostile takeover. Only a skilled and clever professional can tackle such situations. There are certain defensive moves which the company can make to avoid the takeover by big companies.

Golden Parachute:
In the event that the target's senior management is fired as a result of a successful hostile takeover, golden parachutes are further compensation. This defense lowers the price the acquirer is ready to pay for the target's shares since these compensations lessen the target's assets. Thus, this defense might hurt investors. But it successfully thwarts aggressive takeovers. Senior management gives themselves hefty exit packages to hurt the attackers and weaken their assets.

Pacman Defense:
As implied by the name, this defensive tactic is inspired by the Pac-Man video game. Instead of letting themselves be purchased, the target business attempts to seize control and acquire the bidder. The target business requires a "war fund" to carry out this plan. This is a sizable sum of cash and other assets that the firm keeps on hand to deal with unforeseen events like a hostile takeover.

The money is placed in highly liquid assets like treasury bills so that it is not kept sitting in the company's coffers. They are instantly convertible into cash. High liquidity assets are regarded as cash equivalents and occasionally referred to as merely cash.

Greenmail Defense:
Blackmail ransom payment and greenmail defense are extremely similar. A hostile takeover is threatened if a bidder purchases a sizable quantity of target firm shares. The target firm feels threatened and is compelled to pay a hefty price to acquire back the shares. Greenmail is the sum of money that the target gives to the bidder to stop the hostile behavior.

It serves as a safeguard against a hostile takeover of the business. The extra cash or premium the target pays to repurchase its shares is referred to as "greenmail." After receiving this ransom or money, the bidder or acquirer withdraws and abandons the takeover effort.

Crown Jewel:
Films and television programmes frequently depict this defensive tactic. The target corporation chooses to sell its most valuable assets or business divisions under this approach. The acquirer no longer finds the target as desirable as before. Usually, the target will use this tactic as a last resort to protect oneself against an invading force.

The situation has led to the corporation purposefully destroying its operations. The most precious and financially successful branches/assets make up a company's crown jewels. Not only do they provide money for the firm, but they also significantly increase its asset value and have promising futures. Between sectors and businesses, the crown jewels might vary.

The factories and manufacturing processes are typically regarded as the gems of the manufacturing sector. Typically, the target business sells its prized possessions to a trusted third party. The White Knight is another name for this third business. When the hostile takeover is abandoned by the acquirer, the target buys back the crown gem at a set price. Until the gem is recovered, the firm is temporarily destroyed by the crown jewel defense.

Poison Pill:
It alludes to the poison pills that spies once carried around in case they were discovered by their enemy. They would take the poison pill if they were captured to avoid being interrogated and tortured by their adversaries. The poison pill defense also functions similarly in the corporate realm. A discounted right to buy shares of the target firm has been distributed by the shareholders of the target company.

These rights are transferred to the other shareholders if the acquirer's stake in the business reaches a particular level. The acquirer's ownership of the firm is significantly reduced by this defensive tactic. This renders the acquisition unfavorable for the acquirer. The management will remain in charge thanks to this method, and the corporation will safeguard the interests of the minority owners.

I believe that formations and dissolution of firms is like life and death of an individual but from a legal perspective. Whereas, mergers and demergers are like marriage and divorce of legal entities. Every firm must go through every legal aspect involved in mergers & acquisitions. Smart business operators save themselves a hassle to go through such legal documentations.

Huge MNC's with huge turnovers hire legal and financial advisors to look into such matters to avoid any mishappenings. A good legal counsel should have an eye for detail as well as good decision making power. Although hostile takeover attempts are extremely unusual, the target firm nevertheless has a number of defense mechanisms at its disposal. Companies may use different tactics to eliminate the bidder all at once.

The crown jewel defense is one of the more severe methods, while the golden parachute is one of the more subtle ones. Most businesses have preparations in place in case there are unforeseen events, like a hostile takeover. Written By: Shivam Narwal ( Law Student) - BBA LLB (Hons)

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