Question

Critically discuss four mechanisms managers might use to try to avoid unwanted offers of acquisitions.

Answer 1

(1) White Knight Defense: If a board feels like it cannot reasonably prevent a hostile takeover, it might seek a friendlier firm to swoop in and buy a controlling interest before the hostile bidder. This is the white knight defense. If desperate, the threatened board may sell off key assets and reduce operations, hoping to make the company less attractive to the bidder.

Typically, the white knight agrees to pay a premium above the acquirer’s offer to buy the target company’s stock, or the white knight agrees to restructure the target company after the acquisition is completed in a manner supported by the target company’s management.

(2) Staggered Board Defense: A company might segregate its board of directors into different groups and only put a handful up for re-election at any one meeting. This staggers board changes over time, making it very time-consuming for the entire board to be voted out.

(3) Poison Pill Defense: To execute a poison pill, the targeted company dilutes its shares in a way that the hostile bidder cannot obtain a controlling share without incurring massive expenses.

A "flip-in" pill version allows the company to issue preferred shares that only existing shareholders may buy, diluting the hostile bidder's potential purchase. "Flip-over" pills allow existing shareholders to buy the acquiring company's shares at a significantly discounted price making the takeover transaction more unattractive and expensive.

(4) Greenmail Defense: Greenmail refers to a targeted repurchase, where a company buys a certain amount of its own stock from an individual investor, usually at a substantial premium. These premiums can be thought of as payments to a potential acquirer to eliminate an unfriendly takeover attempt.

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