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Takeover Defenses

In: Business and Management

Submitted By Azua
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DQ # 4

Takeover refers to a situation where a company seeks to acquire another to expand product breadth, geographic or customer base or it might want to expand and diversify into related or unrelated product markets, pursue undervalued resources, or manipulate financial indicators, including risk profiles, performance variability, and financial leverage (Pearce & Robinson, 2004).On the other hand, hostile take-over involves an outside entity, making a tender offer to shareholders of a target firm and as suggested by Pearce & Robinson (2004), it involves directly approaching the company’s shareholders ignoring the executives and the board of directors. However, there are appropriate takeover defences that can be utilised to safeguard any hostile takeover and these could be discussed below:

Firstly, poison pill is a defense strategy in which the target company offers its stockholders preferred stock in the merged firm at a highly attractive rate of exchange as a mandatory consequence of a successful takeover (Pearce & Robinson, 2004).. The reason behind this is to dilute the stock such that the attacking firm loses money on its investment. Example research conducted by J.P. Morgan offers evidence that poison pills benefit target firm stockholders.

Secondly, to prevent unwelcome corporate suitors from acquiring enough stock to take control of the corporation, flip-in poison pills can be used and with flip-in options, stockholders are given the right to acquire additional shares in the target company at a substantially lower price than the current offering (Pearce & Robinson, 2004). For example, All American Semiconductor announced in 2000 that its board had adopted a flip-in poison pill to be activated when a pursuer announced a tender offer that would result in its owning 15 percent of the common stock.

Another takeover defense is a corporate charter amendment, which staggers the elections of members to the board of directors of the attacked firm so that all are not elected during the same year (Pearce & Robinson, 2004).A well-established board will fend off an attacker’s advances. Example, M&F Bancorp, the parent corporation for Mechanics & Farmers Bank, in 2000, added eight charter amendments designed to defend against a hostile takeover.

Pearce & Robinson (2004), further stated that litigation helps a target company to stall hostile attacks, but is usually not effective as a long-term deterrent. It involves pursuing a legal injunction and restraining order against a pursuer to bar that company from acquiring additional stock until such time as the pursuer can prove legally that the justification for the injunction is unfounded. During the time the pursuer is preparing and presenting its legal rebuttal, the target company usually develops other strategies to prevent the takeover.

Lastly, a standstill agreement can be signed by the parties in which the pursuer agrees not to acquire any more stock of the target firm for a specified period of time in exchange for the firm paying the pursuer a fee.

Pearce, J.A., & Robinson, R.B. (2004).Hostile takeover defences that maximise shareholder wealth. Business Horizons, 47 (5), 15-24.…...

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