Question

What are some examples of defensive actions that companies take to prevent takeovers in M & As? Discuss with some actual examples of successful and unsuccessful defensive efforts. Include in the discussion examples of company stock buybacks. What was the purpose of these stock buybacks? What was the impact of the buyback on the common stock price of the company?

Answer 1

There are various defensive actions to prevent hostile takeover by a company and many relate to preventing the attacker in getting controlling share holding.

For example, giving preference shares to known confidants, share buyback from the market before the attempt, employees buying out the company letting limited stocks in the market, bulk offer only at exorbitant prices

In some cases it can also harm the company like taking excessive debt, or selling most prized, or giving excessive resources to employees

However, some strong defenses can be built through the boards and articles of associations(AoA) for example minimum rotations or replacement of boards in short period, having specific clauses in  AoA against hostile takeover like limiting maximum share transaction in short period or permission to nominate boards at much higher shareholding like 40% or 50% etc

Company stock buybacks by promoters / employees reduces the shares outstanding in open market therefore limiting share percent to make a hostile take over. How ever this is also used by companies to return excess cash to its shareholders. it is also given as a signal to the market that promoters have higher faith in the company and therefore has more value than the market is anticipating.

In case of purging of shares due to buy back the share price of all the outstanding shares are expected to rise by the same margin as lesser number of share holders have stakes to the same company assets.