Strategies of Merger and Acquisition- Maithri Ananthashayana, Amity , Bangalore

Merger and Acquisistion

1. Defense Strategies of Takeovers

2. Strategies Nancy reason defense Non-voting Stocks Pac-man Defense Pension finalizing People pill Lollipop Defense Macaroni Defense Lobster Trap Shark Replacement Poison Put Bank Mail Greenmail Crown Jewel Defense Poison Pill Flip-Over Grey Knight Suicide Pill Killer Beas Leverage Recapitalization Lock-up Provision

3. Strategies Safe Harbor Scorched-earth Defense Showstopper Staggered Board Standstill Agreement Targeted Repurchase Top-up Treasury Stock Showstopper Treasury Stock White Knight White Squire Voting plan White mail

4. Bank Mail A bank mail defense strategy is one where the bank of the target firm refuses financing options to the firm that is keen on taking it over. This is done with the objective of preventing an acquisition and by doing the following: Depriving the merger through non-availability of finance Increasing the transaction costs of the acquirer Delaying the takeover and permitting the target firm to develop other anti-takeover strategies

5. Greenmail It is a practice where the target company purchases enough shares of another publicly traded company that poses a threat of takeover. The threat forces the target firm to buy those shares at a premium to avoid/suspend the takeover. This buyback is referred to as the bon voyage bonus, as it enables the target company to be left alone by the greenmailer.

6. Crown Jewel Defense Crown jewels represent the most valuable unit or department of a company. These units are categorized as crown jewels based on their profitability, value of assets owned, and future growth prospects. As these are the most valuable parts of the company, they are often used as a takeover defense. Here the company creates anti-takeover clauses whereby it gets the right to sell off the crown jewels in the event of a hostile takeover. Such a clause obviously deters the acquirer from attempting the takeover of the firm.

7. Poison Pill Poison pill/super poison put is a strategy adopted to increase the likelihood of negative results over positive ones for the company attempting a takeover. This term has been derived from warfare terminology. Poison pills were pills laced with poison that spies used to carry and would consume when captured, to avoid the possibility of being interrogated for the enemy's gain. In a takeover bid, it represents an anti-takeover defense wherein the current management team of the target company threatens to quit en masse in the event of a successful hostile takeover.

8. Flip-Over It is a type of poison pill where the current shareholders of the target company are given the option to purchase discounted shares/stock after the potential takeover. The strategy involves giving a dividend in the form of rights, so that the existing shareholder can purchase equity or preference shares at a value lower than the prevailing market price. Once the takeover is complete, the current shareholders can 'flip over' the rights, allowing them to purchase the acquirer shares at a discount. This strategy results in dilution and price devaluation of the shares held by the acquirer, and defeats the very purpose of the takeover.

9. Grey Knight A Grey Knight grey knight is an informal and ambiguous intervener in the takeover battle that makes a counter bid for the shares of the target company. His bid causes confusion between the original acquirer and the target company, as the intentions behind the counter bid are not clear.

10. Jonestown Defense/Suicide Pill Jonestown Defense/Suicide Pill The Jonestown defense is another defense mechanism against hostile takeovers. Here the target firm employs tactics that might threaten its own existence, so as to thwart an imposing acquirer's bid. Since the strategy threatens the very existence of the target, it is also known as a 'suicide pill' and represents an extreme version of the poison pill.

11. Killer Bees Under this strategy, the target company employs firms or individuals to fend off a takeover bid. The target company wants to avert the takeover attempt and either is unable to do this on its own or does not want to be seen doing so. Hence it employs other firms or individuals to do the job for it.

12. Leveraged Recapitalization This is another strategy used to fend off a hostile acquisition. Here the target company either borrows significant additional debt that facilitates repurchase of stocks through a buyback program, or distributes a liberal dividend among the current shareholders. This leads to a sharp increase in the share price and makes the company a less attractive takeover target, for the acquirer has to pay more for the target company, thus minimizing the gains.

13. Lock-up Provision Lock-up Provision It represents a strategy wherein an option is granted by the seller to the buyer to purchase a target company's stock as a prelude to a takeover. The acquirer requires a lock-up agreement before making a bid as it facilitates the negotiation progress. As a result of this arrangement, the major or controlling shareholder gets effectively 'locked up' and is not free to sell the stocks to a party other than the potential buyer, Lock-ups can be of several types Soft -one that permits the shareholder to terminate the agreement if a better offer comes along Hard -one that is unconditional and cannot be terminated Stock lock-up -where the bidder is either allowed to purchase the authorized but unissued share capital of the controlling stockholder or the shares of one or more large stockholders Asset lock-up -where the target firm grants an option for the acquisition of an asset. This lock-up is also known as a crown jewel lock-up.

14. Nancy Reagan Defense This strategy is one where the board of directors of the target company say 'no' to the formal bid made by the acquirer to the shareholders to buy their shares. The board of directors has the authority to resist a takeover attempt and the matter ends there. The constitution of the company gives them this authority.

15. Non-voting Stock Non-voting stock comprises shares that provide the shareholder with very little or no voting rights on issues such as election of the board or mergers. Such shares are usually issued to individuals who want to invest in the company's profitability and success, but are not interested in voting rights. Preference shares are typically non-voting shares. Such shares help in making the company a closely held company and act as a takeover defense.

16. Pac-Man Defense This strategy is commonly used to prevent a hostile takeover. Here the target company counters the takeover bid by trying to acquire the bidder's company by making a counter offer to purchase the business of the acquiring company. This diverts the attention of the acquirer, who becomes busy in preventing the takeover of his own company.

17. Lobster Trap A lobster trap is an anti-takeover strategy whereby the target firm issues a charter preventing individuals with more than 10% ownership of convertible securities such as convertible bonds, convertible preference shares, and warrants from transferring these securities to voting stock. This charter becomes a barrier and hostile takeover becomes difficult. If the acquirer enters this trap, it becomes difficult to exit as the acquirer can neither acquire controlling stake in the business of the target, nor can it exit from the limited stake acquired. As a result of this decision, all that the acquirer can do is to repent its decision of making a takeover attempt.

18. Shark Repellent/Porcupine Defense Provision Shark repellent is another measure in the series of measures taken by a target company to fend off a hostile takeover attempt. In this case, the target company makes special amendments to its bylaws that become active only when a takeover attempt is announced. The objective of these special amendments is to make the takeover less attractive to the acquirer. Shark repellent is a repellent applied by deep sea divers to prevent sharks from attacking them. In a takeover situation, the acquirer is the shark and the proposed amendments repel the shark and prevent the attack. It is important to remember that such measures are not always in the best interest of the shareholders, as they may adversely affect the financial health of the company and result in deviating the attention of management from critical business objectives.

19. Poison Put Poison put, also called event risk covenant, is a strategy where the bondholders and stockholders are assigned a right whereby they can demand redemption of stock before maturity, at a value in excess of the par value or purchase the company's shares at a very attractive fixed price in case of restructuring of the company, excess distribution of dividend, a leveraged buyout (LBO), or a hostile takeover attempt. Such a condition helps the management of the company to deter the takeover attempt by making the target very costly for the acquirer. It is important to remember that this strategy can work against the company

20. Safe Harbour Safe Harbour is a type of shark repellent that works as explained in Section 2.4.19(Shark repellent). Here again, the target company creates barriers making it difficult for the acquirer to succeed in its takeover attempt. The barriers work to keep the target safe in the Harbour and beyond the reach of the acquirer, the shark.

21. Scorched-earth Defense The concept of scorched earth originated as a military strategy, wherein a retreating army would burn crops and trees, so that the advancing enemy would be starved of fresh supplies. As an anti-defense strategy, the scorched earth policy involves liquidating valuable and desired assets and assuming fresh liabilities, so that the proposed takeover becomes unattractive to the acquiring firm.

22. Showstopper The concept of a showstopper implies inserting a clause that imposes an additional financial burden on the acquirer in the event of a takeover. Here, the acquirer is required to pay for the offer within a stipulated period. If the acquirer fails to pay the dues, the shareholders of the target may grant extension, subject to the acquirer agreeing to pay interest to the shareholders for the delayed payment. If the acquirer refuses to pay the additional amount, the agreement falls through.. In both the events, the acquirer is the loser. If the deals fall through, the acquirer has to compensate the target; if the acquirer agrees to pay the interest, it imposes financial burden on the acquirer. Since this clause has the potential of creating financial burden on the acquirer, it deters the acquirer from going ahead with the takeover.

23. Staggered Board of Directors A staggered board of directors is a defense wherein a certain percentage of the company's directors is replaced every year, instead of the entire board being replaced annually. This strategy makes it difficult for the acquirer to seize control over the target, as the hostile bidder has to win more than one proxy fight at successive shareholder meetings to exercise control over the target.

24. Standstill Agreement In this form of hostile takeover defense, an unfriendly bidder agrees to limit his holdings of a target firm. This is made possible by the target firm's willingness to purchase the potential acquirer's raider's shares at a premium price. This offer goes a long way in enacting a standstill or eliminating the chances of a takeover attempt by the potential raider. This strategy also gives the target company some time to build up other takeover defenses. While the strategy may be beneficial to the target company, equity shareholders dislike the same, for it limits the potential return on investment available through takeover.

25. Targeted Repurchase In this strategy, the target firm purchases back its own shares from an unfriendly bidder at a price well above market value. The number of shares purchased help the target firm to regain controlling interest in the company by having adequate shareholder votes to prevent the hostile acquisition from taking place. If the strategy results in abandonment of the takeover attempt, targeted repurchase can be considered a success.

26. Top-up A top-up is a type of stock repurchase program wherein shares are repurchased from the existing shareholders of the company. The buyback results in immediate reduction of the voting power of the shareholders. However, the shareholders may subsequently increase their holdings through additional purchase which is called a top-up.

27. Treasury Stock Treasury stocks, also known as reacquired stocks, are shares/stock bought back by the issuing company with the objective of reducing the amount of outstanding stock in the open market. This strategy is a tax-efficient tool of giving cash to shareholders instead of dividends, which is perceived to be the routine obligation of the company. This strategy is adopted by companies to protect themselves against a takeover threat. It is also resorted to when the company feels that its shares are undervalued in the open market. The shares repurchased are either cancelled or held for reissue.

28. White Knight This is a situation where a target faces a hostile takeover attempt from a company and is struggling to avoid the same. At this moment, another company makes a friendly takeover offer to the target company to help the target successfully avoid the hostile takeover bid. Since the friendly takeover offer is to save the target company.

29. White Squire A white squire is similar to a white knight. The only difference is that a white squire exercises a significant minority stake, as opposed to a majority stake. A white squire does not have any intention of getting involved in the takeover battle, but serves as a figurehead in defending the target in a hostile takeover. The white squire enjoys special voting rights for the equity stake that it holds in the company.

30. Voting Plan or Voting Rights Plan Voting Plan or Voting Rights Plan This is a type of poison pill that the target company issues against hostile takeover attempts. This plan is implemented when the company's constitution provides for shares that carry superior voting rights compared to ordinary shares. When an unfriendly bidder acquires a substantial voting stock, it may still not be able to exercise control because the stock carrying superior voting rights will help the company fight the hostile takeover bid. For example, Asarco had a voting pattern wherein holding 99% of the company's common stock would give the holders only 16.5% of the voting power. Poison pill is a term that refers to any strategy, generally in business or politics, to increase the likelihood of negative results over positive ones for a party that attempts any kind of takeover.

31. Whitemail Whitemail is another takeover defense strategy wherein the target company issues a large number of shares at a price quite below the market price to a friendly party. This forces the acquiring company to purchase these shares from the third party to complete the takeover. This strategy discourages the takeover as it becomes more difficult and expensive and the corporate raider must shares from a party which is friendly to the target company. Once the takeover attempt is averted, the target company may either buy back the issued shares or leave them floating in the market. purchase