FREE online courses on Mergers & Acquisitions - Chapter 7 - Other Anti
Takeover Defenses
Finally, if an unfriendly takeover does occur, the company
does have some defenses to discourage the proposed merger:
- Stand Still Agreement: The
acquiring company and the target company can reach agreement whereby the
acquiring company ceases to acquire stock in the target for a specified period
of time. This stand still period gives the Target Company time to explore its
options. However, most stand still agreements will require compensation to the
acquiring firm since the acquirer is running the risk of losing synergy values.
- Green Mail: If the acquirer is an
investor or group of investors, it might be possible to buy back their stock at
a special offering price. The two parties hold private negotiations and settle
for a price. However, this type of targeted repurchase of stock runs contrary
to fair and equal treatment for all shareholders. Therefore, green mail is not
a widely accepted anti-takeover defense.
- White Knight: If the target company
wants to avoid a hostile merger, one option is to seek out another company for
a more suitable merger. Usually, the Target Company will enlist the services of
an investment banker to locate a "white knight." The White Knight Company comes
in and rescues the Target Company from the hostile takeover attempt.
In order to stop the hostile merger, the White Knight will pay a
price more favorable than the price offered by the hostile bidder.
- Litigation: One of the more common
approaches to stopping a merger is to legally challenge the merger. The Target
Company will seek an injunction to stop the takeover from proceeding. This
gives the target company time to mount a defense. For example, the Target
Company will routinely challenge the acquiring company as failing to give
proper notice of the merger and failing to disclose all relevant information to
shareholders.
- Pac Man Defense: As a last resort,
the target company can make a tender offer to acquire the stock of the hostile
bidder. This is a very extreme type of anti-takeover defense and usually
signals desperation.
One very important issue about anti-takeover defenses is
valuations. Many anti-takeover defenses (such as poison pills, golden
parachutes, etc.) have a tendency to protect management as opposed to the
shareholder. Consequently, companies with anti-takeover defenses usually have
less upside potential with valuations as opposed to companies that lack
anti-takeover defenses. Additionally, most studies show that anti-takeover
defenses are not successful in preventing mergers. They simply add to the
premiums that acquiring companies must pay for target companies.
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