Takeover Defense Essay Example
1. Introduction: What is a hostile takeover?
A hostile takeover occurs when one company takes over another against its will. This occurs in the cases of publicly traded companies that have issued stock for purchase. A hostile takeover occurs when the buying company owns a majority of the votes. A company acquires a vote each time it acquires a share. Therefore, by issuing shares for purchase, a company becomes subject to possible hostile takeovers. Reasons for a hostile takeover include financial gain as well as access to distribution channels, customer base, and technology (Grabianowski). Although management may at time oppose a takeover, a merger or acquisition is not always necessarily a bad move for a firm.
2. Definition of Takeover Defense
The strategies that accompany takeover defense are also known as shark repellent. These strategies are crucial knowledge for anybody managing a successful publicly traded company. It is called shark repellent because of a popular metaphor, which compares high-powered investors to sharks. Sharks are so important in the case of hostile takeovers that there are firms that are solely hired to detect their activity regarding the development of potential hostile takeovers as they happen. These firms’ are called shark watchers. Their responsibilities include soliciting proxies, monitoring trade patterns, and identifying the parties accumulating shares (Gorzala, 2010). Aside from this, takeover defense involves many different kinds antitakeover measures.
3. Types of Takeover Defense
Firms can execute a takeover defense strategy in many ways. Using charter amendments, asset restructuring, and various laws and regulations can be used to contribute positively to the firm’s probability of independence. An example of using charter amendments as a tool for shark repellent is the poison pill, which is a strategy that companies use in order to discourage the shark from wanting to attempt a hostile takeovers (Schwert, 1997). There are two types of poison pills. Firms use a flip-in by allowing existing shareholders to buy shares more cheaply, immediately giving investors a bigger profit and a dilution tool that is crucial in a defense strategy. A flip-over strategy is used in the case of a merger, where the acquirer’s new shares are offered to the existing shareholders at a discount.
Some measures not only have creative strategies but also creative names, such as ‘crown jewel defense’ and ‘Pac-Man defense’. Security measures such as golden parachutes require the acquirer to pay lump sums to any management personnel who gets fired due to a takeover (Schwert, 1997). A macaroni defense, which is almost like a pre-emptive strike, refers to the issuance of bonds under the condition of a high price of redemption in the case of a takeover (the metaphor refers to the blowing up of a piece of macaroni during the heating process).
4. Takeover Defense From A legal Perspective
There are many legal factors on which takeover defenses are dependant. In the analysis of Japanese corporate governance, Professor Tsuru Kotaro highlights how geo-politics and law must be considered when establishing takeover defense regulations. Often times, the government of a state or country sets specific guidelines, which allow or disallow certain defensive measures. The differences of institutional infrastructure in various countries offer different legal hurdles. The laws of US corporations that affect antitakeover measures are generally perceived to have a pro-management bias, which neglects the goal of an economy-oriented Japan attracting more companies and generating greater tax revenue (Kotaro). The conflicting interests create uncertainty and potential for conflict and unrest.
It is a general understanding hostile takeovers and takeover defense are two sides of the coin that is the market for corporate control. In order to understand how markets for corporate control are developed, one must analyze the laws associated with a country’s business ideologies, predominant banking strategies, social practices, along with a slew of other elements. The hostile takeover of Mannesmann AG by Vodafone sparked researchers into an inquiry regarding institutional barriers to takeovers. The conclusion was that systemic changes in matters affecting corporate governance legally eroded these barriers (Hopner, & Jackson, 2006). The question many ask themselves is whether or not this is ethically acceptable.
5. Ethics of takeover defense
Although it may seem ethically acceptable to protect oneself from a hostile takeover, there are situations where a successful takeover defense strategy may actually be detrimental to the firm. Shareholder wealth maximization (SWM) and profit maximization are usually two primary objectives of publicly traded companies. Considerations of ethics and social responsibility often influence the price of securities (Poitras, 1994). Sometimes a company and its shareholders can benefit from a takeover due to added human and capital resources, but some controlling force does not wish to proceed (Poitras, 1994). Herein lies the dilemma. If takeover defenses often rely on changes in prices, and costs in general, relevant to securities and shares, owners’ ideals and ethics can lead to many miscommunications, disagreements and occurrences of conflict amongst shareholders.
In conclusion, a firm must outweigh all the legal and ethical factors that affect their firm, including state and government laws, as well as the management’s relationship with shareholder. All considered, selecting a strategy may be more difficult than initially perceived. Mark Gordon is a partner in the mergers and acquisitions firm of Wachtell, Lipton, Rosen & Katz and professor at New York University School of Law. His work entitled Takeover Defenses Work. Is that such a bad thing? Highlights the various ethical dilemmas, which accompany hostile takeovers and takeover defense. His research that takeover defenses such as ESBs help the targeted company independent from hostile takeovers, but at the same time, the companies who stay independent end up in worse situation than those who sell their stocks to the acquirer (Gordon, 2002). Therefore, it is a very delicate matter, which must be measured and assessed with short-term and long-term consideration and of course with minimal bias.
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