Hostile takeover defenses: an Overview
In recent months, the takeover of Twitter by Elon Musk was in news. The running joke was that the amount Mr. Musk offered for Twitter could have been used for paying off the national debt of Sri Lanka, which is struggling with a financial crisis. Later on, the deal was put on hold regarding the number of fake profiles on the microblogging platform.
However, for a legal/business enthusiast, one of the key highlights would be Twitter’s strategy to counter the takeover, the poison pill. For a newbie, it must be a bit confusing as to why someone would want to prevent a takeover for a huge amount, which, as I said earlier, could pay off the debt of a country's debt. The other thing would be understanding the poison pill strategy.
The primary issue where why a business wants to prevent a takeover is solely a business decision. There is little legality in why one would want to prevent a takeover or accept one. The second is also in a way, a business decision, but is a basic question any Merger and Acquisition student would have. In simple words, a poison pill is a counter-measure for a hostile takeover. Here, I will try to explain a few of the defence strategies that a company may take against a hostile takeover. But first, let us understand what a takeover and a hostile takeover mean.
Takeover and hostile takeover
In plain language, a takeover is a process where an acquirer takes over the control of a target company. This can be done with or without the consent of the shareholders. When done without the consent of the board of directors, it’s called a hostile takeover. It can be done in three ways; a tender offer where the acquirer offers to buy shares directly from the shareholders at a premium; a proxy fight where the acquirer approaches the shareholders for their voting rights and with enough rights, they can bring a change in the management; the last one is creeping tender offer where the acquirer buys enough shares from the open market to change the management.
Need for a hostile takeover
A hostile takeover can have a number of reasons. In the case of Twitter, the stated reason for the takeover by Elon Musk was ‘free speech’. Twitter had been in a battle to curb misinformation and disinformation on the platform. It was said to be the reason for the 2021 US Capitol attack. Following the incident, Twitter suspended the Twitter account of US President Donald Trump owing to the “…recent Tweets from the @realDonaldTrump account and the context around them we have permanently suspended the account due to the risk of further incitement of violence.[1]” This could be the reason why Elon Musk wanted to takeover Twitter.
However, takeovers can be resorted for other reasons as well. Dirt cheap valuations with a high potential for future growth, the acquirer company wanting to enter the market they are currently not in, because there are chances that the target company could be a potential competition or because the revenue generation of the target is attractive.
Hostile takeover defences
As said earlier, the hostile takeover is akin to a corporate war. For the same, different tactics are used by both the acquirer and the target company. While most of the tactics of the acquirer are limited to the tender offer, proxy fight and creeping tender offer, the defences for a hostile takeover are numerous. Let us see a few of those tactics here.
a.????Bank Mail
A bank mail defence is where the bank of the target firm refuses the financing options to the acquirer. Since most takeover requires a sizeable amount of money, which the acquirer may not have in reserve and the banks would need to make a consortium to finance it. The objective of this strategy is to:
·??????Depriving the merger through non-availability of funds
·??????Increasing the transaction cost
·??????Delaying takeover so that the target firm can develop other strategies.
b.????Crown Jewel
A crown jewel refers to the most valuable asset or department of the target company. It may be in terms of profitability, the value of owned assets or future growth prospects. In this tactic, when there is an event of a hostile takeover, the target company adds anti-takeover clauses whereby it gets the right to sell off the crown jewel. This would make the deal far less lucrative. In extreme cases, the target company may even sell off the crown jewel even before the takeover happens.
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c.????Poison pill
This is the tactic which Twitter took when Elon Musk hinted at a hostile takeover. This term is adopted from warfare terminology. The spies use a poison pill when caught to kill themselves so that the enemies won’t be able to extract any information from them.
The poison pill strategy in M&A is a double-edged sword. The strategy works when the current management team threatens to quit en masse, upon a successful hostile takeover. The reason that this is a double-edged sword is that success depends upon the efficiency of the leadership. If the leadership is efficient and they carry out the strategy, then the company will be without any experienced leadership to smoothen the transition. On the other hand, if the leadership is inept, it may actually help the company as they may get fired after the takeover anyway.
d.????White knight
A white knight is basically the ‘knight in shining armour. When a hostile takeover is imminent, a friendly takeover offer is given by another company for the target company to avoid the hostile takeover bid.
e.????Suicide Pill
A suicide pill is an extended version of the poison pill. While in poison pill, the objective is to make the target company less attractive, the suicide pill strategy takes it one step further. Here the target firm employs tactics that would threaten the existence of the company itself. These strategies could include:
·??????Ceasing the operations itself
·??????Taking on unaffordable debts
·??????Paying out unaffordable dividends
·??????Place itself in a situation of bankruptcy
This is also called a Jonestown defence, named after the infamous Jonestown, where the infamous Jonestown massacre was carried out by the Peoples Temple leader Jim Jones.
Conclusion
A hostile takeover is much like war. Even if it is successful, the people of the country would be hostile to the new boss, unless the old boss was not popular. But all this depends on the details of each case. In some cases, it might be harmful. In others, advantageous. Depending on the circumstances, hostile takeovers can be beneficial or detrimental. In some cases, the acquirer may be drawn to the target company due to its assets, technology, and distribution network, which it wishes to integrate into its existing business. The shareholders of the target company may receive a premium above the market price, costing the acquirer more. There have been cases where hostile takeovers have benefited both parties. However, it has typically resulted in the destruction of value and a major corporate bloodbath.