What Is an Overtake?
A sophisticated business deal in which one company buys another involves a corporate takeover. A number of logical factors, such as projected synergies between the target company and the acquiring company, the potential for considerable revenue increases, lower operational expenses, and advantageous tax considerations, frequently lead to acquisitions.
How Unfriendly Takeovers Operate
The majority of corporate takeovers in the United States are friendly in nature, meaning that most important stakeholders are in favor of the acquisition. However, hostile corporate takeovers do occasionally occur. When one corporation takes over a publicly traded company without the approval of the board of directors or the current management, this is known as a hostile takeover. Typically, the buying business buys a predetermined percentage of the target company’s voting shares together with the authority to establish new corporate policies.
Vertical acquisition, horizontal acquisition, and conglomerated acquisition are the three methods for acquiring a publicly traded firm. The removal of ineffective management or the board and a rise in future earnings are the primary motivations behind hostile acquisition implementation, at least in theory.
How to Prevent a hostile Takeover
In light of this, the management of potential target enterprises might employ several fundamental defense techniques to thwart unwelcome takeover efforts.
Poison Pill Protection
The first poison pill defense, also known as a shareholder rights plan, was introduced in 1982 by New York attorney Martin Lipton as a warrant dividend scheme. This defense is debatable, and several nations have restricted its use. The targeted firm dilutes its shares so that the hostile bidder cannot acquire a controlling share without incurring significant costs in order to carry out a poison pill. The corporation may issue preferred shares that only current shareholders may purchase in a “flip-in” pill version, reducing the likelihood that a hostile bidder will make a purchase. By allowing existing shareholders to purchase the acquiring company’s shares at a steep discount, “flip-over” pills make mergers and acquisitions more complicated and expensive.
When Carl Icahn stated that he had bought roughly 10% of Netflix’s shares in an effort to take over the firm in 2012, such a strategy was put into practice.
In response, the Netflix board implemented a shareholder-rights plan to make any takeover bid prohibitively expensive. According to the terms of the plan, if anyone acquired 10% or more of the business, the board would permit its shareholders to purchase newly issued company shares at a discount, diluting the stake of any potential corporate robbers and making a takeover virtually impossible without consent from the target company. The next three years would see the implementation of this plan.
Defense of the staggered board
A business may divide up its board of directors into distinct sections and only run for reelection at certain meetings. The staggered board changes over time make voting to remove the entire board highly time-consuming.
White Knight Protection
A board may look for a friendlier company to rush in and purchase a controlling interest before the hostile bidder if it feels unable to avert a hostile takeover. The white knight defense is used here. In a last-ditch effort to lower the company’s attractiveness to potential buyers, the threatened board may sell off important assets and scale back operations.
The white knight typically agrees to pay more than the acquirer’s offer to buy the target firm’s stock, or the white knight undertakes to restructure the target company in a way that is acceptable to the target company’s management once the acquisition is complete.
The 2008 purchase of National City Corporation by PNC Financial Services (PNC) to aid in the company’s survival during the subprime mortgage lending crisis and the 2009 acquisition of Chrysler by Fiat to prevent it from going under are two well-known instances of white knight engagements in the corporate takeover process.
Defense with greenmail
A targeted repurchase, or “greenmail,” is when a business buys a specific number of shares of its own stock from an individual investor, typically at a significant premium. These premiums can be viewed as payments made to a prospective acquirer in order to thwart an unwelcome takeover attempt.
When Carl Icahn purchased 9.9% of the shares of Saxon Industries for $7.21 per share in July 1979, it was one of the first times this idea had really been put into practice. In order to stop the corporate takeover action, Saxon was compelled to repurchase its own shares at a price of $10.50 per share.
While greenmail’s ability to prevent takeovers is effective, several businesses, including Lockheed Martin (LMT), have included anti-greenmail clauses in their corporate charters.
Due to the capital gains tax that is now levied on the gains obtained from such hostile takeover strategies, the use of greenmail has decreased over time.
Differential Voting Rights Stocks
The creation of stock securities with varied voting rights would be a proactive measure against a hostile business takeover (DVRs). Stocks with this kind of clause provide stockholders fewer voting power. For instance, owners of these securities might need to possess 100 shares in order to exercise one vote.
Create a plan for employee stock ownership
Create an employee equity ownership plan as another preventative measure against a hostile company takeover (ESOP). An ESOP is a retirement plan that qualifies for tax breaks and benefits both the firm and its stockholders.
Employees of the corporation can acquire ownership in the business by forming an ESOP. As a result, it is more possible that a larger portion of the firm will be owned by shareholders who will cast their votes in accordance with the management’s opinions of the target company rather than with those of a prospective acquirer.
