Question

(M&A): the existing answers for similar questions below are not clear, please use bullet point and give the overall answers and reasons why to support them, ( From the perspective of target firms or for acquirer firms?)

What are the advantages and disadvantages of the friendly versus hostile approach to a corporate takeover?

What are the primary advantages and disadvantages of commonly used takeover defences (Preoffer / Postoffer Defenses)?

Answer 1

Friendly offer:

• Refer to the acquisition of a target company that is willing to be taken over.
• Usually, the target will accommodate overtures and provide access to confidential information to facilitate the scoping and due diligence processes.
• Normally the process is started voluntarily by target company, but can be initiated by friendly overture by acquirer seeking better information to value target.

Both parties have opportunity to structure deal to their mutual satisfaction:

• Taxation Issues (stock offer instead of cash offer)
• Asset purchase rather than stock purchase
• Earn outs

Hostile offer:

• A takeover in which the target has no desire to be acquired and actively rebuffs the acquirer and refuses to provide any confidential information.
• The acquirer usually has already accumulated an interest in the target (15% of the outstanding shares) and this preemptive investment indicates the strength of resolve of the acquirer.

Acquirer’s tactics:

• Bear hug: acquirer submits merger proposal directly to target’s board of directors
• Tender offer: acquirer offers to buy shares directly from target’s shareholders
• Proxy battle: acquirer seeks control over target by having target’s shareholders approve a new board of directors chosen by acquirer. If successful, the new board may then replace target’s management and execute a friendly merger.

Sl. No.	Defense Measure	Mechanism
1.	Poison Pill*	Poison pill gives the shareholders of the target company right to buy target's shares at very attractive (discounted) prices. This increases the cost to potential acquirer. Flip in pill is when target shareholders have right to buy targets shares, flip over is when they have right to buy acquirers shares.
2.	Poison put	Bondholders of the target demand immediate payment of their money in case of an acquisition. This creates strain on acquirer to arrange for the cash
3.	State protection	Certain states have policies which don't favor takeovers
4.	Staggered board	Target can stagger their board, allowing only part of it reelected every year. Hence, acquirer is not able to get control of the board for years.
5.	Restricted voting rights	Voting rights of shareholders holding above a certain percentage of the company are restricted. Hence, it is difficult for the acquirer to submit a tender offer
6.	White Knight	Target company finds a friendlier buyer to merge with
7.	Pac man	Target company attempts to buyout the Hostile Buyer
8.	Supermajority voting for mergers	Provision that mergers can only be approved by a huge percentage of shareholders (as against normal majority in normal cases). Acquirer hence has to get support of those many shareholders to be able to take over the target
9.	Nancy Reagan	BOD decides to reject the offer
10.	Fair Price Amendment	Provision stating that unless a fair price is offered for the target (determined by some provision), the merger can't be done
11.	Golden Parachutes	Provision in which target management gets a hefty severance pay and cash payouts in case of a hostile takeover. This though doesn't deter the acquirer, it serves personal purpose of the management
12.	Greenmail	Some money is offered to the acquirer to withdraw the offer and abandon the plans to take over for a specified period. Although this method was popular earlier, but tax laws were changed in late 1980s taxing such money heavily. Then onwards it has declined in popularity
13.	Lobster Traps	Target firm issues a charter preventing individuals with more than 10% of the convertible securities from converting them to common shares
14.	Others	A general practice to delay the takeover process is to file a lawsuit against the acquirer. Courts may provide some injunction against the takeover Repurchase of the target’s stock by the target company to reduce the no. of shares of stock Delisting the public company stock and going private