Post-Offer Defense Mechanism
Includes a group of strategies the target company can use after the acquirer makes the takeover bid.
What is a Post-offer Defense Mechanism?
Businesses employ takeover methods to grow and penetrate domestic and international markets.
When an acquirer attempts to take over a company against the wishes of management and the board of directors of the target company, it is referred to as a hostile takeover, as opposed to a friendly takeover which happens with the support of target management.
A target company may take different defensive measures to thwart a hostile takeover bid, postpone the takeover, or bargain for better terms.
A hostile takeover can be resisted using two types of defensive measures:
- Pre-offer defense mechanism - It includes strategies the target company uses to resist the hostile takeover before the acquirer makes the bid.
- Post-offer defense mechanism - It includes a group of strategies the target company can use after the acquirer makes the takeover bid.
The target corporation employs various post-offer defense tactics, including the white knight defense, Pac man defense, greenmail, etc. Sometimes, target companies employ these tactics to buy time to prepare for a more formidable defense mechanism.
Key Takeaways
- The pre-offer defensive methods are utilized before the acquirer makes the offer and diminishes the target company's appeal.
- The post-offer defensive strategies are used after the target company receives the bid. Different Post-defense tactics, such as green mailing, Pac-man, white knight, etc., can be used to thwart the hostile takeover.
- In crown jewel defense, the target firm sells the most profitable asset or subsidiary to make the acquisition undesirable.
- In the Green mailing technique, the company acquired its shares, generally at a premium, to block a potential acquisition.
- Under the Pac-man defense strategy, the target company makes the counter bid to buy the hostile acquirer.
- J.P. Morgan played the role of the white knight in 2008 by purchasing Bear Stern after it was on the verge of bankruptcy.
Types of Post-offer Defense Mechanisms
The post-offer defense mechanism includes several strategies the target company can use to block the hostile takeover. The company can use one or a combination of these strategies.
The target firm may take several defensive measures directed at the bidder in response to a hostile tender offer. These measures are described as follows:
1. Green mail
When a company purchases a chunk of its common stock held by an individual shareholder or a group of shareholders, the transaction is known as "greenmail." The repurchase is usually done at a premium, and other shareholders are not included in the offer.
Targeted repurchases or Green mail strategy can be used as a takeover defense by giving a bidder a financial incentive to withdraw the offer and sell its shares to the issuing company at a profit.
2. Standstill agreement
These agreements restrict a company's ownership for a specific amount of time. For example, the deal may include giving the major shareholder some board seats.
Additionally, the shareholder may consent to cast their ballots along with management. These agreements act as a takeover defense by temporarily removing a possible bidder.
By holding a position on the board, the shareholder may yet exercise some control over corporate assets. A standstill agreement, therefore, resembles a treaty more than a defense.
3. Litigation
One of the most typical post-offer defensive strategies is to sue the company that made the bid. The lawsuits accuse the bidder firms of fraud, antitrust and securities violations, and other offenses.
The lawsuit attempts to serve two functions.
- It delays the bidder, which encourages the emergence of rival bids.
- The litigation pushes the bidder to increase the offer price to persuade the target to withdraw the lawsuit and save on legal fees.
4. Acquisitions and Divestitures
This strategy may involve selling an asset the bidder wants, purchasing assets that the bidder dislikes, or purchasing assets that will result in antitrust or other legal issues. The company's asset structure can be modified to counter a takeover offer.
Each of these activities diminishes the bidder's willingness to pay for the target by making it less desirable to the bidding company.
5. Restructuring of Liabilities
The issuance of voting securities might raise the number of shares required by a hostile bidder. As a result, the company transfers these voting securities into the hands of allies who promise to support the current managers.
This strategy can lower the number of publicly traded shares, making it more challenging to purchase a sufficient number of shares to take control.
In addition, such repurchases are frequently financed by debt issuance, which may make the company less appealing to potential buyers. As a result, these restructurings lessen the wealth of stockholders.
6. “Just Say No” Defense
During a hostile acquisition, the target business might reject the proposal. The firm management might argue that the offering price needs to be increased or that it is not in the best interest of shareholders if the acquirer makes an offer.
For the takeover to be effective, the acquirer must either reassess its price or disclose its plan.
7. Crown Jewel Defense
In this strategy, the target firm will attempt to make itself undesirable or less appealing by selling a profitable asset or subsidiary.
The sale of the subsidiary would prompt the acquirer to give up the hostile takeover proposal if the disputed subsidiary had been the primary driving force for the takeover.
But there is also a good probability that the court may find that launching a crown jewel following the news of a hostile acquisition violates the law.
8. Pac-Man Defense
In this strategy, the target will submit a counterbid to buy the hostile bidder. However, in the real world, this is uncommon since it implies that a larger business (the acquirer) is being taken over by a smaller one (the target).
Note
The target cannot utilize litigation as a backup plan if the takeover fails once it employs this tactic.
9. White Knight Defense
In this tactic, the target will search for another, more acceptable acquirer—the white knight—instead of the hostile bidder. As a result, the hostile acquirer will make a higher target price offer.
However, the white knight will increase its proposal once it recognizes the strategic benefits of capturing the target.
In many instances, this might lead to a bidding war where the winner might overpay. It's known as the winner's curse.
10. White Squire Defense
While a white knight exercises a majority share, a white squire only exerts a sizeable minority stake.
The role of a white squire is to represent the company's defense against a hostile takeover rather than actually to take over the business. For their equity investment, the white squire receives special voting privileges.
Real-world examples of Post offer defense strategies
There are many instances in the world where Post offer defense strategies used by the target company to thwart the hostile takeover.
Some well-known cases are as follows:
1. JP Morgan Chase and Bear Stearns
Global investment bank Bear Stearns looked for a white knight in 2008 after suffering terrible losses during the global financial crisis. Because of the 92% decrease in the company's share price, it was now a takeover target and at risk of going bankrupt.
JP Morgan Chase has agreed to buy Bear Stearns for $10 per share. The original offer from JPMorgan to stockholders was $2 per share, which was significantly lower than the $133 per share the business traded for just a year prior.
By purchasing Bear Stearns to keep it from going bankrupt after its stock price fell, J.P. Morgan Chase played the role of the white knight.
2. Saxon Industries and Carl Icahn
Carl Icahn is an American investor. Icahn profited from the aggressive takeovers in the 1980s, which helped him gain a reputation as a "corporate raider.” In 1980, he bought 9.5% of the outstanding common stock in Saxon Industries, a specialty paper distributor based in New York.
Saxon paid $10.50 per share to buy back its shares from Icahn in exchange for Icahn agreeing not to engage in a proxy fight. Saxon used a green mailing strategy here to avert the potential takeover.
Icahn made a 45.6% return on this investment after initially paying an average price of $7.21 per share.
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