You noticed your favorite football team has changed defenses to stave off an aggressive opponent. Just like one of your portfolio companies trying to thwart a hostile takeover by changing poison pill defenses. You wonder, what is a poison pill in business? Read: What is the Strongest Takeover Defense? The answer may surprise you.
What is the Strongest Takeover Defense?
The strongest takeover defense varies depending on the company’s specific situation and the type of hostile threat. Examples of circumstances that make firms takeover targets are when the company’s shares are undervalued, poor management performance, strategy fit attractiveness, and mismanagement of large cash reserves.
Implementing the strongest takeover defense will depend on the nature of the takeover, such as a hostile or friendly takeover, a leveraged buyout (LBO), or a reverse or creeping takeover. Different corporate diseases require different takeover medicines. What is the strongest takeover defense? is best answered by reviewing successful protection strategies.
Poison Pill – Escalating the cost of taking over a firm is an effective deterrent. Takeover targets, companies being acquired, will offer their existing shareholders the opportunity to purchase additional stock at a discount. Increasing the number of outstanding shares increases the acquirer’s cost of gaining control, making the target firm less attractive.
People Pill – The threat of mass exodus of key personnel and existing management can be a hostile takeover deterrent.
White Knight - Target firms will often offer to sell themselves to a friendly suitor as a defense to being acquired by a hostile bidder.
Staggered Board – Controlling the board is paramount in gaining company control. By staggering board member terms of service, only a small percentage of seats are up for election per year making quickly controlling the board much harder to achieve.
Multiple Stock Classes – An effective hostile takeover defense is dual-class stock issues. Threaten companies may issue two classes of stock with one having superior voting rights. Transferring ownership of these priority voting shares to the firm’s owners allows them to maintain control without owning the majority of outstanding shares.
What is the strongest takeover defense? The type of threat determines the protective strategy. As in football, tennis, martial arts, and business, the strongest defense is the most effective against the threat at hand.
Leverage Recapitalization – Companies will increase their debt load to halt an unwanted takeover. Faced with an acquisition threat, a firm may significantly increase their leverage to finance buybacks or distribute a special dividend. Making the firm more expensive to acquire makes them less attractive.
Crown Jewel Defense – If a target no longer has what an acquirer wants, it becomes less attractive. Under siege companies will sell off the attractive assets an acquirer covets to discourage the takeover attempt.
Pac-Man Defense – This is the I’ll-eat-you-before-you-eat-me defense. A target company may attempt to acquire the acquirer as an aggressive turn-the-tables defense tactic.
Greenmail – Target companies may offer to purchase a hostile acquirer’s shares at a premium in exchange for the acquirer not pursuing the acquisition. This defense strategy is not illegal but has been viewed as unethical if the acquirer’s original intent was never to purchase the firm but to extort an inflated price for their acquired stake. Greenmail remains a regulatory and legal lighting rod.
What is the strongest takeover defense? The strongest takeover defense is the best strategic choice that preserves the target firm, accomplishes the board and management’s objectives, and has the best threat protection compatibility.
