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Adlai Chua

Adlai Chua


Total Article : 14

The Hostile Takeover (pt.2)

The Hostile Takeover (pt.2)

The first defence I shall be exploring, is the Shareholders Right’s Plan, also known as ‘Poison Pills’ method; in essence, this will allow shareholders the right to buy company shares at massively discounted rates compared to the market value. This will prompt investors to purchase the target’s stock in bulk and once they have a significant proportion of the target firm, eg. 25%, it becomes unattractive to the potential acquirer. Such defence will dilute the potential ownership, making it expensive to buy back – thus discouraging advances. This defence has been taken by Finish Line, a sporting goods retailer which cut shares by 23% to allow their majority shareholder – Sport’s Direct, a UK retail giant to purchase and gain a greater share of the firm from 9.2% to 19.9%. Ultimately, discouraging potential acquirers.


Other strategies by the Killer Bees include increasing the overall transaction cost for the acquiring firm. No firm will want an over-priced acquisition and one way this can be done is to offer massive compensation packages to top directors and management, and to accentuate the cost, the target firm may offer packages to subordinates and lower managers. These tactics are known as ‘Golden Parachutes’ and ‘Silver Parachutes’ respectively. Other advantages of the plan include discouraging the target firm’s directors from leaving the “sinking ship” as they are guaranteed either a) continuation of job or b) a massive pay-out. Therefore, becoming a win-win situation for the directors.


Target firms are usually selected on the basis that they have great potential for synergies because of low volumes of debt. Thus, target firms are able to defend themselves though borrowing substantial amounts to discourage what was once attractive to pursuing firms. By exhausting their debt capacity, firms seeking the takeover would have to carry on the extra costs by repaying the debt, otherwise ruining future plans.


Responses to the Shark Repellent


After commenting on the defences, a particular target firm can impose, the acquiring firm may still be hungry. Looking for such opportunities to seek greater control through eliminating competition from the market may still be promising, regardless of the heightened associated costs with the transactions.


Options available now to the firm seeking to takeover may include making a tender offer or engage in a proxy war. I will be discussing first the tender offer, then later the proxy war. The tender offer usually involves the predatory firm making an offer to buy out shareholders’ shares of the target firm at an inflated price. This premium looks attractive to the investors and if more than 51% of the equity is sold, then the acquiring firm by nature has a majority and thus assumes control of the business. Usually, the tender offer is very attractive as it provides an option for the investors to sell their shares at a premium.


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