Takeover defenses

Takeover defenses consider activities and measures with one common goal – preventing a hostile takeover. They are classified into groups according to the impact on the transaction: delay, voting, protection, other defenses, state law.

One could refer to takeover defenses also as proactive defenses, deal-embedded defenses and reactive defenses depending on the takeover phase.

Takeover defenses generally result in lower valuation: why is this so? The results suggest that neither competing management nor speculators find these firms interesting targets.

To explain the above statement in details … Managers may not see them as interesting targets due to the presence of provisions against takeover making them very costly to acquire, and the process being a long and complicated one which may displease shareholders as it wastes company resources. On the other hand, speculators may wish to avoid investing in firms with a high number of takeover defenses as they may feel that these show the company to be poorly managed and thus a poor investment as management is concerned with preserving its position by avoiding dismissal by new owners.

Takeover defense tactics

Due to the specifics of the legislation popularity of specific takeover defenses vary from one country to another. Generally speaking, a company defends itself from a takeover (claimed as an acquisition or a merger) as presented below:

  • Shareholder rights plan (also known as Poison pills): A broad term referring to favorable rights given to company’s shareholders, such as the right to acquire the bidding firm’s stock at a major discount. Since every shareholder is able to buy more shares at a discount, such purchases dilute the bidder’s interest, and the cost of the bid rises substantially.
  • Golden parachutes: An automatic payment made to managers after a firm is taken over. These may seem like a reasonable request by managers, since most managers of acquired firms are removed from power less than two years after a takeover.
  • Staggered boards: This type of takeover defenses is considered as one of the most effective defenses available to managers to prevent takeovers. Staggered boards are boards of directors where directors are elected at different times and serve overlapping terms which do not begin and end simultaneously. The measure makes it very difficult for a potential acquirer to gain control of the entire board at any time and thus it cannot be facilitated by making the board agree to terms.
  • Greenmail: Essentially similar to a bribe to prevent someone from pursuing a takeover. The management of the potential target firm will offer to buy back stock at a premium in exchange for the owner not pursuing control of the company for a period of time.
  • Supermajority rules: These takeover defense measure refers to rules in the articles of association making it necessary to have a large proportion of the vote to gain approval for a hand over in control or a change in the articles of association. The majority needed makes external corporate governance less effective, since it becomes more expensive to gain control of a company. At the same time however, the power of shareholders over company management is solidified.
  • Need for approval by the board of directors: Rules in the articles of association stating that anyone wishing to buy stock from the company and become a shareholder must seek the approval of the board of directors. Effectively this makes it far more difficult to gain control.
  • Temporary suspension of voting rights: A takeover defense measure deriving from the articles of association which stipulates that following the acquisition of shares there is a certain time period during which the voting rights attached to them cannot be used. This delays a possible takeover process.