Anti Takeover Strategies

Antitakeover Measures - Basics

Prompted by the new levels of hostility during the 1980s
Development of Corporate defenses were relatively slow
as compared to hostile takeover tactics.
Antitakeover measures became quite elaborate and
difficult to penetrate.
End of the 80s saw the art of antitakeover defenses
become very sophisticated.

Preventative and active measures

Preventative Antitakeover Measures (PAM)

Most Fortune 500 companies have considered and
developed a plan in the event that the company becomes
the target of a hostile bid.
Some of these plans are directed at reducing the value
that a bidder can find in the firm.
First step to develop PAM is to carefully analyse
shareholding pattern (employees are loyal and might
resist hostile takeover).
Watch for any sudden increase in trading volume

Poison Pills

Types of PAM

First generation poison pills preferred stock plans

Second generation poison pills flip over rights
Third generation poison pills flip in poison pills

Corporate charter amendments

Staggered terms of the board of directors

Supermajority provisions
Fair price provisions
Dual capitalisation

Golden Parachutes

First generation Poison Pill

Developed by takeover lawyer Martin Lipton
Used it in 1982 for El Paso Electric against General
American Oil
In 1983 for the Brown Foreman vs Lenox takeover
context.

Brown vs Lenox
Brown Foreman fourth largest distiller in US marketing brands like Jack
Daniels, Martel Cognac, Korbel Champagne, with sales of $900 million
Lenox a major producer in China trading at $60 on NYSE

Brown offered $ 87 per share to Lenox 20 times its last EPS of

4.13

Based on advice of Martin Lipton Lenox issued

Preferred shares that would be convertible into 40 shares of Brown
Foreman stock if Brown took over Lenox.
If converted it would have diluted Brown familys 60% ownership

Issues
Issuer could only redeem them after an extended period of around 10 years
Immediate adverse impact in the balance sheet
The preferred stock is added to the long term debt making the company
highly leveraged.

Second generation poison pills Flip over rights

Became popular in late 1985 after Martin Lipton perfected it

No preferred stock in the new pill

Rights offering that allowed holders to buy stock in the
acquiring firm at a low price
These rights certificates distributed as dividends and
get activated upon triggering of an event like
An acquisition of 20% of the outstanding stock by any
individual, partnership or corporation
A tender offer of 30% or more of the target
corporations outstanding stock

Goldsmith vs Crown Zellerbach Corporation

Crown Zellerbach a forest product company with holdings in

forest related assets.

Goldsmith saw great value in these forest assets lands

Crown issued a poison pill to buy $200 worth of stock in the

merged concern for $100. this significant discount for current
crown Zellerbach stockholders would make it less valuable.

Activated when either an acquirer bought 20% of Crowns stock

or made a tender offer for 30% of crowns stock. The rights
become exercisable after a bidder bought 100% of the
companys stock.

Third generation poison pills Flip in poison pills

Flip in provisions allow holders of rights to acquire stock in
the target, as opposed to flip - over rights which allow
holders to acquire stock in the acquirer.
The flip in rights were designed to dilute the target
company regardless of whether the bidder merged the
target into his company.
The presence of flip in rights make such controlling
acquisitions very expensive.
A flip in plan is used against a control share acquisition
that is not a 100% acquisition.

Poison Pill adopted 1983 - 2000

Corporate Charter Staggered Terms of BoD

Shareholder approval is usually required to install a
staggered board
It provides one third of the board to be elected each year
for a three year term.- referred as classified board
Every member of the non-classified board comes up for
election at each annual meeting
Staggered elections extend the amount of time a bidder
will have to wait before he or she can attain majority
representation on the board.

Super majority Provisions

A charter dictates the number of voting shares needed to
mend the corporate charter or to approve important issues
such as mergers.
A super majority provision provides for a higher than
majority vote to approve a merger typically 80% or two
thirds approval.
More extreme versions of these require 95% majority
The courts have upheld the legality of supermajority
provisions when these provisions have been adopted
pursuant to shareholder approval.

Dual Capitalisation

- Trump vs Griffin

Dual capitalisation is a restructuring of equity into two

classes of stock with different voting rights.
Ex: General Motors used its class E shares to segregate the
performance and compensation of shareholders of its EDS
division.

Purpose to give greater voting power to a group of

stockholders who might be sympathetic to managements view

Management often increases its voting power directly in a

dual capitalisation by acquiring stock with greater voting
rights.

The stock with superior voting rights might have 10 to 100 votes
of each share of stock

Trump Versus Griffin

Battle involving superior voting rights in 1988 between Donald
Trump real estate tycoon and TV personality Merv Griffin
The battle was for a Resort Casino in Atlantic city
Resorts had two classes of stock Class A had 1/100 votes per
share.
Class B had 1 vote for one share.
Class A quoted at $ 75 and Class B unquoted
Trump had 88% voting shares in Resort
Casino licensing regulations permitted individual to own only
three casinos
Trump was taking ownership of a $ 1 billion casino and was
under pressure to palm off one.
Given the situation Griffin made a offer of $ 35 per share for
Class B

Golden Parachutes Bordens People Pill

Special compensation agreements that the

company provides to upper management
The word golden is used because of the lucrative
compensation the executives covered by this
agreements receive.

Bordens People Pill

Borden corporation developed an innovative antitakeover
people pill
Borden revealed top 25 of its executives had signed a contract to
quit the company if the firm were to be taken over by a raider
who did not give stock holders a fair value
Secondly even if a single member of the management was
demoted or fired.
The fair stock price was determined to be a cash offer for 100%
of the stocks value, as determined by an opinion by that firms
investment bankers.
Plus a premium of 50% of firms profits that an acquirer would
reasonably be expected to make from asset sales or other
synergies.
Pill to be activated by an offer for 85% of the firms shares that
were not already in the acquirers hands.

Active Antitakeover Defenses

Green Mail
Standstill Agreements (Gillette)
White Knights (Tyco & AMP)
White Squire (Revlon & Pantry Pride)
Capital Structure Changes (Walt Disney vs Arvida)
Litigation
Pac-Man defenses (Bendix Martin Marietta takeover
battle)

Standstill Agreements - (Gillette)

Standstill agreements occurs when the target corporation
reaches a contractual agreement with a potential acquirer
whereby the would-be-acquirer agrees not to increase its
holdings in the target during a particular time period.

Many standstill agreements are accompanied by the

targets agreement to give the acquirer the right to first
refusal in the event that the acquirer decides to sell the
share it currently owns.

Gillette

Ronald Perelman of Revlon was pursued by Gillette not to make a

offer of $ 65 tender offer to stockholders.

Unique aspect Gillette even paid 1.75 million greenmail to the

investment bank that represented Revlon

Later Coniston Partners initiated an attempt to take control of Gillette

Gillette entered into a standstill agreement with Coniston too.

Gillette entered into standstill agreements with 10 different companies.

Colgate Palmolive
Ralston Purnia
Anheuser Busch
Pepsi Co.
Metromedia
Citicorp
Salomon Brothers
Kidder, Peabody,
Kohlberg Kravis and Roberts
Forstmann Little

White Knights Tyco & AMP

A more acceptable suitors White Knights help is sought
when there is a threat of a hostile bid.
Offers a more favorable price, - acceptable price, higher
price
White Knight will promise not to disassemble the target or
lay off management or other employees

Tyco as White Knight for AMP

Allied Signal Corp launched a $ 10 billion hostile takeover

bid for AMP Inc in 1998

AMP had less than $ 6 billion revenues and $ 500 million in

net income

When the firm failed to remain independent

AMP agreed to sell to Tyco which had sales of $ 12 billion

and $ 1 billion net income

Deal size was $ 11.3 billion

It doubled size of Tyco and generated growth in 1990

White Squire - Revlon vs Pantry Pride

Similar to White Knights defense.
Target company seeks to implement a strategy that will
preserve the target companys independence
Stock selected often is convertible preferred stock
The white squire is typically not interested in acquiring
control of the target
For target the appeal is that a large amount of voting
stock in the target will be placed in the hands of a
company or investor who will not sell to a hostile bidder.

Revlon versus Pantry Pride

Ronald Perelman CEO of Pantry Pride cash offer of $ 53 a share for

Revlon

Financed this offer by borrowing a $ 2.1 billion

Perelmans goal to sell off the health care components and keep the
well known cosmetic business

Revlons board of directors approved LBO by Forstmann at $ 56 a

share.

Perelman revised it to $ 56.25.

Forstmann revised it to $ 57.25 with a lock up option of $ 525 million

for two of Revlons divisions

This was $ 75 million below these divisions actual value

Option would be activated only if bidder acquired 40% of Revlons

shares.

Capital Structure Change - (Walt Disney vs Arvida)

Target corporation may initiate various changes in capital structure.
The defensive changes could be in four main ways:

Recapitalise (pioneered by Goldman Sachs in 1985)

Assume more debt
Bonds
Bank loan

Issue more shares

General issue
White squire
ESOP

Buy back shares

Self tender
Open market purchases
Targeted share re-purchase

Walt Disney & Arvida

Walt Disney became a target of hostile bid by Saul Steinberg and

Reliance Group

Disney began to negotiate with Arvida as it was a natural fit given the
kind of business

The acquisition of Arvida reduced the Steinbergs holdings from 12.1%

to 11.1%

But this increased the holdings of Arvida to 5.9%

This didnt reduce the problem for Disney because Arvida refused to
sign a standstill agreement thus making it one of the potential future
threats.

Pac-Man Defense Bendix Martin Marietta takeover battle.

Companies attempt to eat each other before they are
eaten themselves, - one of the most colorful defenses
Occurs when the target makes an offer to buy the raider in
response to the raiders bid for the target.
Its often threatened but seldom used.