Question

Provide an example of a firm where having a take-over defence would work in the best interest of both shareholders and management. Explain.

Answer 1

Takeover can be formally defined as ‘acquisition of a certain block of equity capital or controlling interest in a company which enables the acquirer to exercise control over the affairs of the company’ and can be categorized broadly into two types a hostile takeover in the former case and a friendly takeover in the latter. When the takeover takes place in a hostile manner, i.e. against the wishes of the target company, the target company often adopts certain measures to prevent or discourage the acquirer from taking over the target company; these measures are called takeover defenses. There is still an unresolved issue in empirical research about corporate control in whether a
take-over actually improves the value of the bidder and the target firm. However, what studies
have been able to show, is that all the gains or positive effects tend to go to the shareholders
of the target firm and that the acquiring firm pays a premium for their company. Furthermore,
hostile takeovers in most cases improve the value for the shareholders of the targeted firm,
thus the term hostile is being used to illustrate the opposition faced by the target firm’s board
of directors and not necessarily the shareholders´. A takeover which takes the shareholders of
the target firm in consideration first, in other words maximizing shareholder value, is called
positive