Takeover Strategies and

Defences
Chapter 8
About Takeover defences
• All actions by a manager or firm to resist or drive away hostile
attempts of takeover
• Sometimes, raider might offer shareholders directly, bypassing board
• Features that make firm vulnerable to takeover attempts
• Undervaluation of market value and/or fundamental value of firm
• High liquidity in Balance sheet
• Strong DCF value as compared to market price
• Non-core subsidiaries and units that can be sold off for cash
• Promoters having low share holding and control
Golden Parachute
• Clause inserted in employees’ contract as severance package
• If roles change post ownership change or in case of removal, employees
are compensated
• Amount of remuneration and total benefits payable specified in clause-
could include bonuses, stock options
• Key employees may exercise option while others may lose jobs
• Mid level employees getting option- silver parachute
• All employees- tin parachute
• Golden handshake- when compensation not linked to ownership change
Leveraged Buyout
• Majority of stake in target firm is bought out using debt funds (70-
80%)
• Bootstrap transaction
• Sometimes, post LBO, ownership is private and the target firm may be
split up, sold off, repay debt and make profits
• Reverse LBO- when company bought out through LBO issues shares,
IPO
• 10 famous LBOs
Management Buyout
• Internal managers/ executives purchase controlling stake from
shareholders
• Advantage to buyers as they have more technical knowledge than
sellers
• Buyers can also potentially manipulate prices
• Can take the company private- can tie up with venture capitalist
• Employee buyout-when internal employees buy shares
• Can be done through ESOPs
Blackstone Makes Its First Management Buyout in India- NY Times

• The private equity firm Blackstone Group said yesterday that it had agreed to buy an Indian
back-office company, Intelenet Global Services Ltd., for an undisclosed sum, in its first
management buyout in India.
• Blackstone will own 80 percent of Intelenet, with the company’s management holding the
rest.
• The Economic Times, quoting unidentified sources, said the deal could be worth $200 million.
• This would value the company at more than double its back-office rival, Allsec Technologies
Ltd., which has a market capitalization of $77 million and is 28 percent owned by the Carlyle
Group.
• The British bank Barclays and an Indian mortgage firm, the Housing Development Finance
Corporation, said separately that they each were selling their holdings in Intelenet, without
disclosing the price.
• Intelenet plans to expand its operations in Britain and begin services out of the Philippines
and Mauritius, said its chief executive, Susir Kumar.
Lady Macbeth strategy
• Hostile raider hires third party
• Third party poses as white knight, gains trust and then joins with
unfriendly raiders
• For example, Company A makes an offer to buy Company T. Company
T does not want to sell to Company A and starts seeking other
bidders. Company W comes forward as a potential buyer and appears
much more willing to work with Company T's terms for a sale.
• The two companies agree on a price and terms, at which point
Company W turns around and brings Company A into the deal by
obtaining funding from it.
Poison Pill
• Strategy to discourage hostile takeover- target attempts to make stock
less attractive to buyer
• Flip-in: issue shares at discount to existing shareholders except raider-
dilution of raider’s stake
• Flip-over: allows existing shareholders to buy shares of acquirer at
discount after merger
• Preferred issue to friendly shareholders with special voting rights
People Pill
• All employees and key management threaten to quit if taken over
• Key clients may also threaten to leave
• The first use of the people pill anti-takeover strategy is attributed to a
food company called the Borden Corporation. In 1989, the company's
board of directors approved a people pill that Borden could use to
demand that an acquiring company pay a fair value for the company's
shares and that it not fire or demote any of Borden's existing
managers. The people pill strategy is a variation of the poison
pill defense. 
Jonestown defence
• Uses extreme tactics that may threaten the survival of target
• For example- Company A makes a bid to buy Company T. Company T's
founder, who is the chairman of the board, absolutely abhors Company A
and refuses to sell the company to them. Company A goes directly to the
Company T shareholders and offers to buy their shares for a 10%
premium.
• Fearful that Company A may be successful in its efforts, Company T
intentionally hurts the value of the company by selling its key intellectual
property to the founder, ceasing advertising, breaking its supplier
agreements in order to slow down production, and laying off 2,000
workers. With key aspects of the company gutted, Company A drops its
bid for Company T, which is now a hollow, valueless shell of its former self.
Crown Jewels
• Selling off the most valuable units/ assets to make business less
attractive to buyer
• Sometimes, part of anti-takeover clauses where crown jewels are
compulsorily sold if hostile takeover happens
• Last resort option
• Crown jewels can also be sold to friendly parties till such time the
buyer gives up interest in buying the target
Crown Jewels example
• Agreement between Sun Pharma and Israeli company Taro related to
merger of Taro in May 2007.
• Some violation of terms as per Taro and it unilaterally terminated
agreement with Sun Pharma.
• In spite of acquiring 36% stake for Rs 470 crore, Sun Pharma had been
injuncted by the Supreme Court of Israel for non-closure of the deal.
• Taro had implemented various defense strategies like crown jewels
defense and sold off its Irish unit along with non-disclosure of
financials to keep away Sun Pharma.
• Sun Pharma finally acquired 48.7% and voting rights of 65.8% in 2010.
Scorched Earth Policy
• Liquidating valuable assets and assuming liabilities to make the proposed
takeover unattractive
• Scorched earth policies may not always be possible. Hostile company may
seek injunction against company's defensive actions, and may be able to
prevent the board from stopping takeover bid.
• For example, a steel company may threaten to purchase a manufacturer
embroiled in lawsuits for making poor quality parts. In this case, the target
company would be seeking to purchase the future liabilities associated with
any lawsuit settlement in an effort to burden the new, combined company
with those liabilities, making it unattractive to hostile bidders. But a hostile
bidder may be able to secure a court injunction to stop this acquisition.
Bankmail
• Agreement between potential buyer and bank which prevents bank from financing
any other possible buyer’s bid
• Could also be between bank and potential target as a defence strategy
• Does not completely eliminate risk of takeover but creates difficulties
• Example-Company A wants to buy Company T. Three other companies are also
interested in purchasing Company T.
• Company A wants to borrow most of the money for the acquisition offer. It goes to
Bank D for the money, but it engages in bankmail. That is, it negotiates a deal in
which Bank D, which is the largest in the country, will lend Company A the money for
the deal and that it will not lend money to the other three companies for the deal.
• In this way, Company A effectively shuts off a source of capital to the other bidders.
Greenmail
• Investor buys shares of potential target to hold on to with intention of selling later at profit
• Target company could fear sale of block to potential buyer
• Hence it pays a premium to investor to buy the shares
• Not very common in India due to SEBI guidelines about buy-back of shares
• Example- In 1986, Sir James Goldsmith held 11.5% stake (at an average of $42.20 per share)
in Goodyear Company and threatened to take over the company for $4.7 billion ($49 per
share).
• In response, Goodyear agreed to repurchase existing shares from Sir James for $49.50 per
share ($620.7 million) contingent that Sir James refrain from purchasing any Goodyear stock
for 5 years. In the end, Sir James made about $93 million in profit.
• Additionally, to prevent another takeover attempt in the future, Goodyear offered to
repurchase 40 million shares, with 109 million shares outstanding, at $50 per share in an
open offer to all shareholders. Ultimately, the purchase of 40 million shares cost Goodyear
$2.6 billion.
Macaroni Defence
• Issue large number of bonds that would be repaid at huge premium if
company is taken over
• Example- Company A wants to buy Company T. Company T doesn't want to
sell because in the board's opinion Company A makes terrible products
and will run the company's brand into the ground. To thwart the effort,
Company T issues $10 million of bonds that are redeemable for 150% of par
value if there is a change in control at Company T.
• So, a person who buys Company T bond with $1,000 face value would have
the right to redeem that bond for $1,500 if Company A buys Company T.
• Company A, seeing this redemption as a cost on top of buying Company T,
backs off the deal.
Shark Repellant
• Any corporate activity to ward off hostile takeover attempts
• Examples- poison pills, golden parachutes, scorched earth policy, etc.
• Part of by-laws and charter- become active only when hostile attempt
presents itself
• Also called porcupine provision
Proxy Fight
• Group of shareholders persuaded to get together and gather enough proxies to carry forward
agenda
• Example- The deal between food company Campbell and hedge fund Third Point ends an
acrimonious boardroom battle days before an investor vote at Campbell’s annual meeting. A
number of heirs to the Campbell fortune, including three current board members, control roughly
41 percent of the company and made it increasingly difficult for Third Point to win the vote count,
people familiar with the matter said.
• Loeb (Third Point) initially asked other investors to help him oust the entire board, saying it was
largely responsible for the company’s lagging share price and a fast-paced takeover spree that
saddled it with a lot of debt. He pushed for a full sale of the company.
• Campbell’s McLoughlin has said the company had lost focus but now has a strategic plan and is
busy executing it, for example, by shopping its fresh foods business.
• The company is still looking for a new chief executive and expects to name one before the end of
the year. Third Point, which has been talking to a potential candidate, will be allowed to have input
in the decision, the company said.
Knight Armours
• White knight-third party which makes friendly takeover offer of target
to protect it from hostile bidder
• Yellow knight- company planning takeover starts talking about merger
• Grey Knight- Unknown, unsolicited bidder- tries to take advantage of
fight between target and acquirer
• Black knight- tries to take over target
Other measures
• Anti takeover amendments
• ESOPs
• Buyback of shares