Defense Mechanism Against Hostile Takeovers

Defense mechanism against takeovers:      

ROMAN ALI KHAN  Roll. No.260367

Defense mechanism against hostile takeovers: The classic ‘poison pill strategy’ (the shareholders’ rights plan) is the most popular and effective defense to combat the hostile takeovers. Under this method the target company gives existing shareholders the right to buy stock at a price lower than the prevailing market price if a hostile acquirer purchases more than a predetermined amount of the target company’s stock. The purpose of this move is to devalue the stock worth of the target company and dilute the percentage of the target company equity owned by the hostile acquirer to an extent that makes any

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‘White Knight’ is another type of defense mechanism. In this case, a third company makes a friendly takeover offer to the company facing a hostile takeover. This is a common tactics in which the target company finds another company to enter the scene and purchase them out and away from the company making the hostile bid. The several reasons why the companies prefer to be bought out by the third company could be -- better purchase terms, a better relationship or better prospects for long-term success. At times these ‘white knight’ companies only help the target company improve the deal terms with the hostile bidder. A very good example is of Severstal which acted as a ‘white knight’ in the Arcelor-Mittal deal, and causing a 52.5

Pac-Man Defense – wherein a target company thwarts a takeover bid by buying stocks in the acquiring company, then taking the bidder company over. Staggered Board:-It is used generally in combination with ‘Shareholder’s Rights’ plan and is considered most effective. This method drags out the takeover process by preventing the entire board from being replaced at the same time. The directors are grouped into classes, each group stands for the election at each annual general meeting. It prevents entire board from 

Golden Parachute is a tactics which works in the manner that it makes the acquisition more expensive and less attractive. It is provision in a CEO's contract, which is worded such that the CEO gets a large bonus in cash or stock if the company is acquired.

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Shares with differential voting rights are shares which ‘carry’ more votes than ordinary shares. They have been allowed in India since 2001 and can be used to thwart hostile takeovers since, for all practical purposes, they decouple economic interest and voting rights.

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Indian auto major Tata Motors announced a Rs 4,200 crore rights issue to part-fund its $3 billion acquisition of the UK-based high-end auto brands – Jaguar and Land Rover (JLR). Structuring the rights offer in a unique manner, the Tata Motors management offered two unlinked offers in the ratio of one share for six shares held. The first part was a regular rights issue which was priced at Rs 350 and raised Rs 2,186 crore. The other part, termed ‘A’ ordinary shares, had a differential voting rights and also attracted differential dividend, and fetched Rs 1,961 crore for the company. The ‘A’ ordinary or differential voting shares were issued at Rs 305, a discount of 12.8% to the regular rights shares and also gave a 5% extra dividend, over the regular voting rights shares.