Business Daily from THE HINDU group of publications
Wednesday, Aug 02, 2006
Mergers & Acquisitions
Columns - Zero Base
Do you have a defensive cocktail to ward off the raiders?
These days, our promoters are busy guarding their brood. The villain they are afraid of is the perceived threat of hostile takeovers, real or imaginary; and their preferred strategy has been to squat a little wider by raising the promoters' stake.
For instance, on July 28, the Hindalco Industries promoters', the Aditya Birla group, announced that the promoters' stake, which is now 25.95 per cent, would gradually be increased through the creeping acquisition route, to ward off any takeover attempt.
Only weeks earlier, Tata Sons, the holding company of the Tata group, had buzzed the fear alarm by saying it would raise its stake in Tata Steel in two stages through a preferential issue of shares. The trigger, ostensibly, was that Mr L. N. Mittal was visiting India, after his victory over Arcelor.
"The steel industry is highly fragmented and considerably vulnerable, and the only safeguard is to increase our stake over time," reasons Mr Ratan Tata to justify the stake increase.
While there can be endless debate on Mr Mittal's wonderment at the Tatas feeling vulnerable, it may be worthwhile studying the various options available to companies when faced with the prospect of hostile takeovers.
For starters, hostile takeover is the opposite of the `friendly' variety. A hostile takeover "goes against the wishes of the target company's management and board of directors," defines www.investorwords.com.
Or, as www.moneyglossary.com explains, hostile takeover happens "when the company being acquired does not want to be purchased." An unwelcome takeover bid, says Encarta. "Hostile takeovers are usually bad news, as the employee morale of the target firm can quickly turn to animosity against the acquiring firm," notes www.investopedia.com.
However, what can cheer up the target firms is the existence of many options to ward off a raider. Also, the use of anti-takeover defences is widespread, "with the most popular defences employed in more than 80 per cent of public companies," as Robert F. Bruner writes in Applied Mergers & Acquisitions, from Wiley (www.wiley.com).
Bruner classifies defence tactics under three broad heads, viz. proactive, deal-embedded, and reactive. Proactive tactics are "put in place in response to a general concern about a potential takeover attempt," as in the case of the two recent Indian examples we'd started off with. These tactics challenge `all potential bidders.'
Where it is necessary `to deter potential competing bidders' you may opt for the deal-embedded methods. "These appear as features of definitive agreements and are intended to raise the ante for an intruder," says Bruner. The third type, that is, the reactive defence, repels specific bidders, by responding directly to `the identity of the hostile bidder and/or the characteristics of the hostile bid'.
Let's start with an attractively named tactic in the proactive category, the `golden parachute.' The phrase means "compensation paid to top-level management by a target firm if a takeover occurs," as www.bloomberg.com defines in an entry that occurs after golden handcuffs, golden handshake, and golden hello.
On www.amex.com, golden parachute is explained as "a takeover prevention or takeover impact reduction strategy that gives the top management of the target company large termination packages if their positions are eliminated as a result of a hostile takeover."
There are also positive motives of golden parachute, points out Bruner. Such as, "increasing employee retention during a takeover fight, motivating employees to focus on shareholder interests rather than personal concerns, and improving the company's ability to recruit new talent."
Benefits offered may be in the form of severance pay, a bonus, stock options, or a combination thereof, as InvestorWords elaborates.
Recently, the US' SEC (Securities and Exchange Commission) conducted one of the biggest investigations into corporate wrongdoing, and is now rolling out new disclosure rules.
Accordingly, companies will have to disclose the value of `golden parachute' severance packages to chief executives as a result of mergers and acquisitions, inform Vineeta Anand and Jesse Westbrook of Bloomberg in a July 26 report on www.chron.com.
Another tactic comes with a deadly name: Poison pill. In this, the target company offers low-price stock to its current shareholders in order to make it more expensive for another company to buy them out, as www.nolo.com explains. "One example is the issuance of preferred stock that gives shareholders the right to redeem their shares at a premium after the takeover," illustrates www.investorwords.com.
Bruner is of the view that the poison pill is `the single most effective defence in the target's arsenal.' Since 1982, when the first pill was placed, no pill has been triggered by any hostile bid, he states. "Indeed, the SEC has argued that this defence is adopted with the intention of not implementing it rather like a nuclear weapon." Bizarrely, the pill comes in two presentations the straight and the chewable. The latter type `dissolves' when there is a very high bid.
Poison pill is much in the news. For example, www.theaustralian.news.com.au has a report dated July 26 that Hokuetsu Paper Mills is poised to become the first major Japanese company to use a poison-pill defence after it rejected an unsolicited $1.2 billion offer from Oji Paper, Japan's largest paper manufacturer. "Motorola board ends `poison pill' plan," announces www.businessweek.com in a July 27 report.
One of the embedded defence tactics is to lockup assets using the `crown jewel' ploy. Wikipedia educates that the crown jewel defence is "a strategy in which the target firm sells off its most attractive assets to a friendly third party or spins off the valuable assets in a separate entity." As a result, "the unfriendly bidder is less attracted to the company assets."
The Free Encyclopedia cites, as example, the 2005 instance of Japan's Livedoor, which warned Nippon Broadcasting System Inc against the adoption of a `crown jewel' takeover defence. "Livedoor called upon the target company to retain the key assets of the radio broadcast station while it battled Fuji Television for takeover bids; the assets included major stakes in Fuji TV, Japan's top television network, and music label Pony Canyon," narrates http://en.wikipedia.org.
A reactive tactic with a game name is the Pac-Man defence, named after a video game that old-timers would have played on PCs. There, the hero, the Pac-Man would gobble up dots on the screen. Some of the dots gave him extra energy, so that he could turn around and devour the ghoul that comes snapping at the heel.
As a defence tactic, the target applies the saying, `offence is the best form of defence' and goes after the bidder, in a counter-takeover move.
"The most quoted example in US corporate history is the attempted hostile takeover of Martin Marietta by Bendix Corporation in 1982," chronicles http://en.wikipedia.org. When Martin Marietta started buying Bendix stock with the aim of taking over, "Bendix persuaded Allied Corporation to act as a `white knight,' and the company was sold to Allied the same year."
Since all is fair in war and love, bidding and raiding, it is not rare to find companies resorting to more than one counter tactic, or what is known as `a defensive cocktail.' For the raider, Bruner shares an insight:
"The single tactic that best ensures successful takeover is to offer a high bid." For, "Money talks." The caveat, however, is that the money talk has to be `within reason', so as "not to destroy value for the bidder's shareholders".
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