Anti Takeover Strategies

Antitakeover Measures - BasicsPrompted by the new levels of hostility during the 1980sDevelopment of Corporate defenses were relatively slow as compared to hostile takeover tactics.Antitakeover measures became quite elaborate and difficult to penetrate.End of the 80s saw the art of antitakeover defenses become very sophisticated.

Preventative and active measures

Preventative Antitakeover Measures (PAM)Most Fortune 500 companies have considered and developed a plan in the event that the company becomes the target of a hostile bid. Some of these plans are directed at reducing the value that a bidder can find in the firm.First step to develop PAM is to carefully analyse shareholding pattern (employees are loyal and might resist hostile takeover).Watch for any sudden increase in trading volume

Types of PAMPoison Pills First generation poison pills preferred stock plansSecond generation poison pills flip over rightsThird generation poison pills flip in poison pills

Corporate charter amendments Staggered terms of the board of directorsSupermajority provisionsFair price provisionsDual capitalisation

Golden Parachutes

First generation Poison PillDeveloped by takeover lawyer Martin Lipton Used it in 1982 for El Paso Electric against General American OilIn 1983 for the Brown Foreman vs Lenox takeover context.

Brown vs LenoxBrown Foreman fourth largest distiller in US marketing brands like Jack Daniels, Martel Cognac, Korbel Champagne, with sales of $900 millionLenox a major producer in China trading at $60 on NYSE

Brown offered $ 87 per share to Lenox 20 times its last EPS of $ 4.13Based on advice of Martin Lipton Lenox issuedPreferred shares that would be convertible into 40 shares of Brown Foreman stock if Brown took over Lenox. If converted it would have diluted Brown familys 60% ownership Issues Issuer could only redeem them after an extended period of around 10 yearsImmediate adverse impact in the balance sheetThe preferred stock is added to the long term debt making the company highly leveraged.

Second generation poison pills Flip over rightsBecame popular in late 1985 after Martin Lipton perfected itNo preferred stock in the new pillRights offering that allowed holders to buy stock in the acquiring firm at a low priceThese rights certificates distributed as dividends and get activated upon triggering of an event likeAn acquisition of 20% of the outstanding stock by any individual, partnership or corporationA tender offer of 30% or more of the target corporations outstanding stock

Goldsmith vs Crown Zellerbach CorporationCrown Zellerbach a forest product company with holdings in forest related assets.Goldsmith saw great value in these forest assets landsCrown issued a poison pill to buy $200 worth of stock in the merged concern for $100. this significant discount for current crown Zellerbach stockholders would make it less valuable.Activated when either an acquirer bought 20% of Crowns stock or made a tender offer for 30% of crowns stock. The rights become exercisable after a bidder bought 100% of the companys stock.

Third generation poison pills Flip in poison pillsFlip in provisions allow holders of rights to acquire stock in the target, as opposed to flip - over rights which allow holders to acquire stock in the acquirer.The flip in rights were designed to dilute the target company regardless of whether the bidder merged the target into his company. The presence of flip in rights make such controlling acquisitions very expensive.A flip in plan is used against a control share acquisition that is not a 100% acquisition.

Poison Pill adopted 1983 - 2000

Corporate Charter Staggered Terms of BoDShareholder approval is usually required to install a staggered boardIt provides one third of the board to be elected each year for a three year term.- referred as classified boardEvery member of the non-classified board comes up for election at each annual meetingStaggered elections extend the amount of time a bidder will have to wait before he or she can attain majority representation on the board.

Super majority ProvisionsA charter dictates the number of voting shares needed to mend the corporate charter or to approve important issues such as mergers.A super majority provision provides for a higher than majority vote to approve a merger typically 80% or two thirds approval. More extreme versions of these require 95% majorityThe courts have upheld the legality of supermajority provisions when these provisions have been adopted pursuant to shareholder approval.

Dual Capitalisation - Trump vs GriffinDual capitalisation is a restructuring of equity into two classes of stock with different voting rights.Ex: General Motors used its class E shares to segregate the performance and compensation of shareholders of its EDS division.Purpose to give greater voting power to a group of stockholders who might be sympathetic to managements viewManagement often increases its voting power directly in a dual capitalisation by acquiring stock with greater voting rights.The stock with superior voting rights might have 10 to 100 votes of each share of stock

Trump Versus GriffinBattle involving superior voting rights in 1988 between Donald Trump real estate tycoon and TV personality Merv GriffinThe battle was for a Resort Casino in Atlantic cityResorts had two classes of stock Class A had 1/100 votes per share.Class B had 1 vote for one share.Class A quoted at $ 75 and Class B unquotedTrump had 88% voting shares in ResortCasino licensing regulations permitted individual to own only three casinos Trump was taking ownership of a $ 1 billion casino and was under pressure to palm off one.Given the situation Griffin made a offer of $ 35 per share for Class B

Golden Parachutes Bordens People PillSpecial compensation agreements that the company provides to upper managementThe word golden is used because of the lucrative compensation the executives covered by this agreements receive.

Bordens People PillBorden corporation developed an innovative antitakeover people pillBorden revealed top 25 of its executives had signed a contract to quit the company if the firm were to be taken over by a raider who did not give stock holders a fair valueSecondly even if a single member of the management was demoted or fired.The fair stock price was determined to be a cash offer for 100% of the stocks value, as determined by an opinion by that firms investment bankers.Plus a premium of 50% of firms profits that an acquirer would reasonably be expected to make from asset sales or other synergies.Pill to be activated by an offer for 85% of the firms shares that were not already in the acquirers hands.

Active Antitakeover DefensesGreen MailStandstill Agreements (Gillette)White Knights (Tyco & AMP)White Squire (Revlon & Pantry Pride)Capital Structure Changes (Walt Disney vs Arvida)LitigationPac-Man defenses (Bendix Martin Marietta takeover battle)

Standstill Agreements - (Gillette)Standstill agreements occurs when the target corporation reaches a contractual agreement with a potential acquirer whereby the would-be-acquirer agrees not to increase its holdings in the target during a particular time period.

Many standstill agreements are accompanied by the targets agreement to give the acquirer the right to first refusal in the event that the acquirer decides to sell the share it currently owns.

GilletteRonald Perelman of Revlon was pursued by Gillette not to make a offer of $ 65 tender offer to stockholders.Unique aspect Gillette even paid 1.75 million greenmail to the investment bank that represented RevlonLater Coniston Partners initiated an attempt to take control of Gillette Gillette entered into a standstill agreement with Coniston too.Gillette entered into standstill agreements with 10 different companies.Colgate PalmoliveRalston PurniaAnheuser BuschPepsi Co.MetromediaCiticorpSalomon BrothersKidder, Peabody,Kohlberg Kravis and RobertsForstmann Little

White Knights Tyco & AMP A more acceptable suitors White Knights help is sought when there is a threat of a hostile bid.Offers a more favorable price, - acceptable price, higher priceWhite Knight will promise not to disassemble the target or lay off management or other employees

Tyco as White Knight for AMPAllied Signal Corp launched a $ 10 billion hostile takeover bid for AMP Inc in 1998AMP had less than $ 6 billion revenues and $ 500 million in net incomeWhen the firm failed to remain independentAMP agreed to sell to Tyco which had sales of $ 12 billion and $ 1 billion net incomeDeal size was $ 11.3 billionIt doubled size of Tyco and generated growth in 1990

White Squire - Revlon vs Pantry PrideSimilar to White Knights defense. Target company seeks to implement a strategy that will preserve the target companys independenceStock selected often is convertible preferred stockThe white squire is typically not interested in acquiring control of the targetFor target the appeal is that a large amount of voting stock in the target will be placed in the hands of a company or investor who will not sell to a hostile bidder.

Revlon versus Pantry PrideRonald Perelman CEO of Pantry Pride cash offer of $ 53 a share for RevlonFinanced this offer by borrowing a $ 2.1 billionPerelmans goal to sell off the health care components and keep the well known cosmetic businessRevlons board of directors approved LBO by Forstmann at $ 56 a share.Perelman revised it to $ 56.25.Forstmann revised it to $ 57.25 with a lock up option of $ 525 million for two of Revlons divisionsThis was $ 75 million below these divisions actual valueOption would be activated only if bidder acquired 40% of Revlons shares.

Capital Structure Change - (Walt Disney vs Arvida)Target corporation may initiate various changes in capital structure. The defensive changes could be in four main ways:

Recapitalise (pioneered by Goldman Sachs in 1985) Assume more debtBondsBank loan Issue more sharesGeneral issueWhite squireESOP Buy back sharesSelf tenderOpen market purchasesTargeted share re-purchase

Walt Disney & ArvidaWalt Disney became a target of hostile bid by Saul Steinberg and Reliance GroupDisney began to negotiate with Arvida as it was a natural fit given the kind of businessThe acquisition of Arvida reduced the Steinbergs holdings from 12.1% to 11.1%But this increased the holdings of Arvida to 5.9%This didnt reduce the problem for Disney because Arvida refused to sign a standstill agreement thus making it one of the potential future threats.

Pac-Man Defense Bendix Martin Marietta takeover battle.Companies attempt to eat each other before they are eaten themselves, - one of the most colorful defensesOccurs when the target makes an offer to buy the raider in response to the raiders bid for the target.Its often threatened but seldom used.