This article is written by Aditya Kasiraman who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
What is a takeover/confiscation bid?
A takeover/confiscation bid refers to the purchase of a company (the target) by another company (the acquirer). In a bidding process, the acquirer usually offers cash, stock, or a combination of both, “bidding” a certain amount to buy for the target company.
In a takeover bid, the company that makes the bid is the acquirer and the company that wishes to control it is called the target. Takeovers are usually started by a large company that wants to take a small one. They can be voluntary, which means they are the result of a partnership decision between the two companies. In some cases, they may not be accepted, in which case the acquirer follows the target without his or her knowledge or sometimes without his or her full agreement.
In business finance, there can be a variety of ways to plan for cash withdrawals. The acquirer may choose to take interest in controlling the remaining shares of the company, purchase the entire company directly, merge the acquired company to create a new partnership, or acquire the company as a service.
Types of Takeover Bids
Four different types of takeover bids include:
- Adoption of Friendship/Friendly Retrieval Bid
A friendly retrieval bid occurs when the board of directors from both companies (target and acquirer) negotiate and approve the bid. The board from the target company will agree to the terms of purchase and shareholders will have the opportunity to vote in favor, or oppose the acquisition.
Example: Aetna and CVS Health Corporation
An example of a request for a friendly takeover bid is Aetna by CVS Health Corporation in December 2017. The resultant company benefited from key synergies, as noted by Chief Executive Officer Larry Merlo in press releases: “By bringing together the skills of the two leading organizations, we will transform consumer health knowledge and build healthier communities through a new, easy-to-use local health model, less expensive, and puts consumers at the center of their care.”
- Capturing Violence/Hateful Retrieval Bid
Hateful retrieval bid occurs when the recipient company seeks to acquire another company- the target company, but the board of directors from the target company have no desire to acquire, or merge with another company or receive a bid price which is not acceptable. The designated company can refuse a bid if it believes that the offer undermines the company’s expectations and strengths. Two common tactics used by recipients are to host the tender award or representative vote.
Tender Offering: Offering by purchasing shares of the target company at a market paid price.
Proxy Vote: To solicit shareholders of the target company to vote for existing executives.
Example: Aphria and Green Growth Brands
An example of an anti-hate petition was an attempt to seize Green Growth Brands from Aphria in December 2018. Green Growth Brands brought a total stock donation to Aphria, costing the company $ 2.35 billion. However, Aphria’s board and shareholders rejected the offer, saying that the offer was highly regarded by the company.
- Reinventing the Takeover Bid/Refund Bid
A refund bid occurs when a private company buys a public company. The main reason for this is to achieve the status of the list without receiving the initial public offering (IPO). In other words, in the provision of a rebate, a private company becomes a public company by taking over a company that is already listed. The acquirer may choose to make a refund bid if it concludes that it is a better option than applying for an IPO. The listing process requires a lot of paperwork and is a tedious and expensive process.
Example: J. Michaels and Muriel Siebert
An example of a retrospective demolition is the reversal of J. Michaels (a furniture company) of Muriel Siebert’s real estate company in 1996, to build Siebert Financial Corp. Today, Siebert Financial Corp. is a subsidiary of Muriel Siebert & Co. and is one of the largest retail discount companies in the United States.
- Back Debt Bid
A background acquisition bid occurs when the acquirer becomes the target company. Withdrawal of money is called a “backflip” because the target company is a surviving business and the acquiring company becomes an integrated corporate entity. A common motive behind a backflip gift offer is for the beneficiary company to apply strong product recognition or other important market parameters.
Example: AT&T and SBC
An example of a bid to reverse an AT&T takeover was done by SBC in 2005. In the sale, SBC bought AT&T for $ 16 billion and named the merged company AT&T because of its strong brand image.
Attacking and Defensive Strategies for hostile takeovers
When a consumer’s promise to buy a company meets a disapproval, there is a chance that the proposed acquisition will become hostile. Companies that are about to accept a takeover must use appropriate security measures to avoid unwanted sales. The finance teams provide budget information that is provided by the organization’s decision makers as they lead the offensive and defensive strategies in these situations. Here’s a detailed look at both sides of hostile takeovers.
What qualifies as a hostile takeover of a company?
Violent seizures occur when the management of the target company or the board of directors refuse to trade. With a lack of approval and cooperation from these decision-makers, the acquirer goes directly to the shareholders of the target company to ensure receipt.
Reasons for hostile takeovers
Consolidation and acquisition are a common effort for companies looking to increase their performance, acquire new skills and resources, or reduce competition, as well as those who get pressure from their shareholders to grow the business. Target companies that refuse adoption deals often do so because they feel that the bid does not pay attention to the company. In addition, the bid may fail to show them the benefits beyond the benefits of operating as an independent business. Managers and boards may question consumer long-term plans and financial prospects. Companies may also be wary of investors seeking to make significant changes in product ownership, performance, policies, or employees.
Benefits of hostile takeovers
While the initial proposal may be unpopular with the target company, hostile recipients have the opportunity to improve recipient pricing and targets, according to the Financial Industry Regulatory Authority. Additional benefits of finding an organization include increased revenue, improved efficiency, and reduced competition. When the acquired companies keep working, there are large reports of the acquirer’s acquired income and the combined funds.
The cost of hostile takeovers
Decreased acquisitions include the risk of falling stocks and company value as well as the high cost of forced sales. Corporate conduct can also be a source of frustration if retrenchment is the catalyst for a major cultural disruption. Earning to take hostile money can also have a negative impact on the reputation of the organization.
Attacking Strategies
There are two major strategies consumers can use to approach hostile takeovers: awarding a tender or fighting a representative.
The awarding of tenders
A tender offer occurs when a buyer promises to buy shares at a premium price. For example, if the current market price of a company’s stock is $ 10, the acquirer can offer to buy it for $ 15, which is a 50 percent premium. If enough shareholders agree to sell their shares, the buyer may receive more shares in the company to which he or she is entitled. Companies that choose the tender process must adhere to the rules set out in the Williams Act. Operated in 1968, the law requires the acquiring company to disclose its terms and purpose of the grant, the source of funding, and the proposed plans if the acquisition is successful. It also gives both prospective buyers and the company enough time to file their claims, and sets deadlines for shareholders to make decisions.
Advantages: Investors are not required to formally purchase stocks until a certain amount has been purchased, which eliminates prior cash withdrawals and prevents stock options from closing.
Disadvantages: If successful, tenders can be expensive and time consuming for investors.
Fighting a representative
Also known as a winning vote or proxy contest, the strategy involves soliciting shareholders to support sales. By doing so, the buyer can then convince those people to vote for the positions of board and senior members who may be eligible.
Advantages: Dismissing opposing members of the board or ruling party allows for taking chances and allows the acquirer to add new members who support change in ownership.
Disadvantages: It can be difficult to collect interest and shareholder support. Also, proxy agents can challenge votes, extending the timeline.
Defensive Strategies
The designated company must decide how it can prevent foreclosure in ways that prepare for the risk of acquisition or respond to potential consumer acquisition efforts. There are many hostile takeover strategies that target companies can use to prevent unwanted purchases. In response to these hostile takeover methods, targets often form the following defenses:
Variation of voting rights
This pre-employment defense strategy includes the inclusion of shares with different voting rights, which means that shareholders have fewer voting rights than executives. If shareholders have to have more voting shares, withdrawing money becomes a more expensive task.
Advantages: This approach gives senior staff a very strong influence on voting results.
Disadvantages: Decreased voting rights may upset shareholders.
Employee stock ownership system
This is another defense strategy to create a tax-paying system that gives employees the highest interest rate in a company. The idea is that employees are more likely to vote for managers than to support a hostile consumer.
Advantages: This strategy can increase employee loyalty and satisfaction.
Disadvantages: Hostile buyers can still lure stocks into proxy wars.
Poison Pill
Probably the most popular defense against antagonists, the poison pill strategy aims to make takeovers expensive enough to deter consumers. It is officially known as a shareholder rights program and allows current stakeholders to buy new shares at a discounted price. This plan does not involve the owner of a hostile takeover with a discounted price, making it difficult for the consumer to get a controlling share without much expense. The poison pill (shareholder rights system) is the distribution of targeted shareholders of the right to buy shares of the target stock or acquirer at a much-reduced price. The cause of these rights is the acquisition of a certain percentage of the target’s shareholding. When exercised, these rights can significantly reduce the acquirer’s shares on the target and thus may prevent a recurrence. The poison pill is one of the most powerful defenses against hostile takeovers. Poison pills can be flip-in, flip-over, dead hand, and quick/absent hand.
A flip-in pill can be “chewed,” meaning that shareholders can force a pill to be redeemed by a vote at some point if the tender award is a monetary contribution for all the target shares. The poison pill can also provide a relief window. That is the time when managers can use the pill. This window therefore determines when the administrator’s right to use expires.
The “Dead hand” pill creates continuous directors. These are the current directors who are targeted and are the only ones who can redeem the pill if the finder threatens to find the target. While earlier court decisions prohibited the use of dead hands and no hand pills, the most recent decisions support those pills.
The “No hand” pill prevents the redemption of the pill over a period of time, for example for six months.
Pac-Man Defense
Targeted companies may choose to avoid taking hostile money by buying shares in the consumer company, so they try to take their own. As a counterpart, Pac-Man’s defense works best when companies are of the same size. In other words, Pac-Man defense is an exclusive bidder for the acquirer’s shareholding tender.
Advantages: Turning the tables puts the first buyer in a precarious position.
Disadvantages: This strategy requires large resources and is very costly for the organization and its shareholders.
Golden Parachute
In the event of a merger or acquisition, a golden parachute contract guarantees significant benefits to the executives of the target company who are terminated as a result of the contract. These contracts can sometimes deter hostile bidders, but at least provide security for managers. Golden parachutes are additional compensation to senior executives of the target company in the event of termination of its employment following a successful hostile takeover. As these compensations reduce the targeted assets, this protection reduces the amount the acquirer is willing to pay for the target shares. This protection could harm shareholders. However, it effectively prevents hostile captors.
Advantages: Companies may combine this approach with other strategies to further discourage hostile consumers.
Disadvantages: This is a controversial strategy that could damage the company’s reputation.
Crown Jewel
Crown jewels are the options under which a popular group can buy a major portion of the target company at a price that may be less than its market value. Using the protection of the crown jewels means selling the company’s most valuable assets, reducing its attractiveness to unwanted consumers. This is a dangerous strategy, because it is ruining the value of the company. As such, many companies will seek out a friendly third-party company, often called a white knight, to purchase its goods. When a hostile buyer puts down a bid, the target company may buy its goods from a third-party strategist.
Advantages: The target company becomes a less attractive acquisition.
Disadvantages: This is a very dangerous defense. Without the white knight, the company will lose its most valuable assets.
Case Study
Great Offshore – Bharati Shipyard vs ABG Shipyard
Chasing the Great Offshore has reached Bharati and ABG in a sea of debt and uncertain future. The massive wave that created waves seven years ago was a fierce bidding by the navy, Bharati Defense and Infrastructure (formerly Bharati Shipyard) and ABG Shipyard, of the offshore services company Great Offshore. Seven years later the contestants are in short supply, deep in debt, and all at sea for their future career.
“It was a war of attrition that was unheard of in Corporate India at the time. The mountain of debt, the tank markets and the collateral that led to the establishment of Great Offshore in 2009,” said an official of a law and tax company that participated in the debt relief program.
The Curse of the Conqueror
“Whites in light clothing, the Bharati Shipyard, held the Vijay Kantilal Sheth stake of 14.89%. Sheth was the Deputy Chairman of Great Offshore. After that, an open promise was made, not for control, but for consolidation,” said the official.
The rush to get Great Offshore by both bidders resulted in the Great Offshore open offering price increasing from ₹344 to ₹90,590 per share, increasing the investment of Bharati Shipyard by another ₹450 crores.
Two months later, SEBI approved two offers. “ABG Shipyard can acquire control of 32 percent of Great Offshore shares at ₹520 per share, in order to gain control, while Bharati Shipyard can acquire 20 percent of ₹590 per share, but without control. In order to gain control, Bharati Shipyard had to do another 20 percent,” said the official.
A day before the two open offerings open at the same time, ABG Shipyard sold its 8.27 percent stake in Great Offshore. “At the last moment, it came out of the race, leaving everyone frustrated, and sparking a new controversy from a legal and business perspective,” the official said. Bharati protection holds Great Offshore.
The “hot chase and the thrill” to get the Great Offshore may have been the curse of the Bharati Defense winner, as seven years later it was wrapped up and surrounded by many prosecutors intending to take over.
Water has problems
Bharati Defense was one of the largest shipbuilders in the country’s private sector, involved in the construction of naval vessels, tanks, passenger ships and naval patrols. The Indian Navy and the port trust emerged among its many customers.
Although it is currently in the process of settling its debt by the National Company Law Tribunal, the company continues to finalize some of its pending orders.
Sources said that following the failure to restructure the company’s debt (CDR), the company’s lenders sold their debts in June 2014 to Edelweiss Asset Reconstruction Company (ARC), a bad creditor. At the beginning of 2017, Bharati Defense had a debt remaining of about $ 1.3 billion (₹8500 crores), of which Edelweiss ARC had 75 percent.
Along with Bharati Defense, the ABG Shipyard is another private shipbuilder facing a major financial pressure with a total debt of ₹16,400 crores.
While the ABG Shipyard saw the trial begin on the Ahmedabad bench of the National Company Law Tribunal (NCLT), Edelweiss ARC filed a lawsuit against the NCLT seeking permission to change the Bharati Defense under a new commander. Edelweiss ARC also sought to file a debt default with the Bharati Defense at the NCLT in order to apply for unsecured creditors.
The NCLT also ordered the commencement of the legal settlement process against ABG Shipyard on August 1, 2017. The UK Liberty House reportedly was willing to meet with other Indian partners to use existing shipbuilding and repair facilities, and to enter into steel-related foreign defense agreements, because the party is also returning to defense and aerospace.
Ironically, the company Great Offshore, once a hotbed of competition, is now embroiled in a court battle. The Bombay High Court has granted two appeals, to close Great Offshore, its total debt being more than ₹2500 crores. Applications have been filed by Export-Import Bank of India and Punjab National Bank.
Conclusion
Based on the above analysis, you may have noticed that not all hostile money laundering efforts end up controlling the victim company. The end result depends on two factors: the legal and economic situation in the market and the defensive strategy used by the target company.
To summarize the impact of hostile takeovers on companies, it must be acknowledged that they are costly businesses for both these aggressive groups. But it should be noted that higher costs are equal to future benefits. In the event that you end up taking hostilities, the profit of the attacking company is the development of the whole company. Therefore, it can be treated as an investment. The withdrawal results in the process of restructuring a new company and the threatened company has to reorganize. If self-defense reforms are successful, they can save the company and allow it to grow. In the opposite case, the completion of the takeover is eliminated and the reconstruction process is carried out by the new owner. In both cases, the quality of the company’s performance improves.
Examining hostile takeovers, in the long run, can be seen as a way to control the quality of companies in the market. Weak and poorly managed companies are taken over by strong companies, which leads to their development. From the perspective of the entire financial market, hostile takeovers and their consequences should be carefully evaluated. In this regard, it is not surprising that legal changes affect the prevention and deterrence of certain self-defensive strategies aimed only at retaining the power of the current board and not leading to corporate reconstruction. Such tactics are those that put a company in debt (a poison pill and a golden parachute) or cause such a change in inheritance, preventing potential invaders. Such a change is detrimental to existing shareholders, as the number of shares should be limited to all public limited companies.
References
- https://corporatefinanceinstitute.com/resources/knowledge/deals/takeover-bid/
- https://www.investopedia.com/terms/t/takeover.asp
- https://www.biryuklaw.com/hostile-takeover-defenses/
- https://onlinebusiness.northeastern.edu/blog/offensive-and-defensive-strategies-for-hostile-takeovers/
- https://www.slideshare.net/pkvijay/hostile-takeover-strategies-with-analysis-of-case-studies
- https://www.researchgate.net/publication/269586171_Defensive_Strategies_Against_Hostile_Takeovers_The_Analysis_of_Selected_Case_Studies
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