A firm having all or any of the following features may provide a temptation to an acquiring firm to take-over the former:
- The target firm has under performed other shares and the overall market in terms of return the shareholders in the preceding years.
- The target firm has been less profitable than other firms, and
- The promoter/owner group has lower shareholding in the target firm and the public has a higher portion.
If an acquiring firm makes an offer for negotiated merger to the management of the target firm, it is up to the latter to accept or not to accept the offer. The target firm may not find the offer to be attractive and hence it may reject the offer. However, the acquiring firm may still persists with the idea either by making a tender offer or attempting a hostile take-over bid. In such a case, it is the responsibility of the management of the target firm to take defensive measures to thwart away any bid for take-over. The management has a fiduciary position in the company and should take decisions in the best interest of the shareholders. Moreover, the existence of the management of the target firm is also uncertain, as there is an all likely chance of change of management of the target firm, if the take-over bid is successful.
What the present management can do in such circumstances? One obvious but impractical solution is that promoter should increase their shareholding so as to have 51 % plus holding. This may require a public offer, which is not only expensive but will also expose the company to a counter bid. Such a situation is not consistent with the concept of a listed company where substantial public funds are used. Alternatively, the promoter and the existing management have three options before it as measures against the hostile take-over bid. These are first, those which can be taken prior to the bid, second, those which are taken up when the bid is in progress, and third, which can be taken up after the completion of the bid. The management of the target firm should adopt tactics and fight away the take-over bid.
The use of ‘killer bees‘ is one anti-takeover measure that a company can employ. Killer Bees are individuals or firms (investment bankers (primary), accountants, attorneys, tax specialists, etc.)that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an attempted hostile takeover from occurring.
The following are some of the anti takeover strategies that may be adopted to avoid/fight away the take-over bid.
1. Legal Strategy
The target firm can take a legal action by moving a court of law for granting injunction against the offer. Relevant provision of Securities Contracts (Regulations) Act, 1956 and the Companies Act, 1956 may be referred to. Lawsuits may be initiated to block or at least delay the tender offer. Refusal to transfer registration of shares is the vintage and one of the most successful of measures. Undoubtedly, the application of this measure is made at the time when the shares are lodged for the transfer by the bidder. However, adequate preparation in advance also needs to be made to ensure that such refusal is successful and is finally upheld in the court of law.
2. Tactical Strategy
The management of target firm can adopt different types of tactical moves to thwart away the take-over bid. The firm can mount a media campaign against the tender offer. However, the campaign must be based on facts and figures. The firm can also send letters etc., to the shareholders explaining them about the defects of the tender offer. The directors may explain that the consideration being offered by the acquiring firm is not adequate and that the merger/takeover does not make any economic sense and the performance of the firm may be adversely affected by the take-over.
The management of the target firm may also persuade their business associates, directors, and employees etc., to purchase the shares of the target firm from the market. This may result in reduction of floating stock of the target firm and thus making it difficult for the bidder firm to acquire the controlling interest. Another way to thwart away the take-over bid is to find out a ‘White Knight‘ who offers a higher bid for the share of the target firm. With the higher bid offered by the White Knight, the take-over may not remain a viable and profitable proposition to the original bidder. However in this case, the target firm still loses its independence to the White Knight, but may get a better deal.
To avoid takeovers bids, some shareholder may detain a large stake of one company shares. With friendly players holding relevant positions of shares, the protected company may feel more comfortable to face an unsolicited offer. A ‘White Squire‘ is a shareholder than itself can make a tender offer. Otherwise it has so much relevance over the company stock composition, that can make raiders takeover more difficult or somewhat expensive.
‘Dual-class stock‘ strategy allows company owners to hold on to voting stock, while the company issues stock with little or no voting rights to the public. That way the new investors cannot take control of the company.
Further that the present management can increase the stake in the target firm by the issue of warrants or convertible preference shares or convertible bonds etc., at a relatively low price. This is a good strategy to fight away the expected take-over bid, however, the provisions of the new take-over code regarding pricing of preferential issues must be taken-care of.
3. Defensive Strategy
The target firm may take some action to destroy the attractiveness of the firm. It may sell, mortgage, lease or otherwise dispose off some of its precious assets. The target firm, if having large liquidity, may dispose of its liquidity by acquiring some assets of other firm. This strategy is also known as “Poison Pill“. For example, high-level managers and other employees may threaten to leave the company if it is acquired. A specific asset of a company like the R&D center or a particular division may be sold off to another company, or spun off into a separate corporation. A flip-in provision may allow current shareholders to buy more stocks at a steep discount in the event of a takeover attempt. The flow of additional cheap shares into the total pool of shares dilutes their value and voting power. A more drastic poison pill involves, if a hostile bid is made, the target firm takes on exorbitant and expensive debts, which make it unattractive. While such a measure is not easily available in India in view of the legal restrictions, this may be considered only as a theoretical strategy.
4. Offensive Strategy
It is also known as ‘Pac man’ Strategy. The target firm in turn, may launch a counter take-over bid on the acquiring firm. For example, firm A makes a tender offer before the shareholders of firm B. As a strategy, the firm B may also make a tender offer to acquire the shares of firm A. However, this strategy can be adopted only in case when the target firm is quite big and financially sound. As a variant, the target firm may also buy-off the acquirer by placing a lucrative offer before the management of the acquiring firm. The management of the target firm may also offer to pay a higher price for the shares in the target firm already purchased by the acquiring firm. It is quite possible that in view of such a move from the target firm, the acquiring firm may not pursue the take-over bid.