What are antitakeover defenses?
Antitakeover defenses are things companies do to stop other companies from buying them. A company might use antitakeover defenses if it doesn’t want to be taken over. Companies can use different kinds of antitakeover defenses.
Why do companies use antitakeover defenses?
There are a few reasons why a company might not want to be taken over by another company:
- The company’s bosses want to stay in charge and don’t want new owners to replace them.
- The company thinks it’s worth more on its own. It believes the price the other company wants to pay isn’t high enough.
- The company doesn’t think being bought would be suitable for its employees or the business. It wants to keep doing things its way.
So, companies that want to stay independent will use antitakeover defenses. These defenses make it more complex and expensive for other companies to buy them.
Types of Antitakeover Defenses
Companies have come up with many different antitakeover defenses over the years. Some of the most common ones are:
Poison pills
A poison pill is when a company makes a unique plan that becomes effective if another company tries to buy it. The plan will make the takeover more costly and challenging for the buying company.
One poison pill gives shareholders the right to buy more stock at a significant discount if someone buys a lot of the company’s stock. This floods the market with new shares and makes it harder for the buyer to get control.
Another poison pill might let shareholders buy stock in the buying company at a discount after the takeover. The buyer wouldn’t want this because then it would have to sell its stock for cheap.
Staggered boards
Companies can set up their boards of directors in a “staggered” way. This means only part of the board is up for re-election each year.
With a regular board, a new owner could replace the whole board at once and take control. But with a staggered board, it takes a few years to get enough of your people on the board to run things.
A staggered board makes a hostile takeover harder. The buyer can’t take over the company as quickly.
Golden parachutes
A golden parachute is a sweet deal a company promises to its top bosses if it is bought and the bosses lose their jobs.
The bosses could get money or stock if they’re let go after a takeover. From their view, this helps make up for losing their jobs. But for the buying company, it makes the takeover more expensive.
Golden parachutes can make a company’s bosses more willing to sell. However, they also discourage buyers because of the extra cost.
Pac-man defense
The “Pac-Man defense” is named after the classic video game. It occurs when the company being taken over turns around and tries to take over the company buying it.
So, if Company A tries to buy Company B, then Company B might start buying a lot of Company A’s stock to try to take control of Company A. Now, Company A has to deal with possibly being taken over itself.
The pac-man defense doesn’t happen very often. It’s an aggressive and risky move. However, it can work to stop a takeover if the target company has enough resources to pull it off.
White knight
A company facing a hostile takeover could look for a friendly company to buy it instead. This friendly company is called a “white knight.”
The white knight rescues the target company from the hostile buyer. The original bosses often get to keep their jobs in this case.
Finding a white knight isn’t easy, though. The target company needs to find another company willing to buy it and that it’s happy being purchased by. The white knight must offer an excellent price to get shareholders to take its offer over the hostile buyers.
Crown jewels defense
The “crown jewels” are a company’s most valuable assets. With a crown jewels defense, the target company sells off its most valuable assets if a hostile buyer gets too close.
The company is betting that the buyer mainly wants those crown jewel assets. The buyer might back off if the target company sells them to someone else.
This can be a risky move, though. Selling important assets could hurt the company’s future business. And there’s a chance the buyer still wants the company without the crown jewels.
Do antitakeover defenses work?
Antitakeover defenses can work to stop hostile takeovers in some cases. But they’re not guaranteed to succeed.
A lot depends on the details of the takeover attempt and the defenses the target company has in place. A determined buyer with deep pockets can often find a way to overcome these defenses.
Even if the defenses work, they might not be great for the company in the long run. Antitakeover defenses can hurt a company’s stock price and make shareholders unhappy.
Shareholders usually want the company to accept the highest offer. Antitakeover defenses often mean saying no to high offers. Shareholders could start wondering if the company’s bosses care more about keeping their jobs than getting the best deal.
Changes to antitakeover defenses
In the past, companies had more freedom to use antitakeover solid defenses. But over time, shareholders pushed back against some of these defenses.
For example, shareholders at many companies have voted to eliminate staggered boards. They think all directors should be elected yearly, making it easier for a new owner to take control.
Some places have also passed laws to limit poison pills and other defenses. These laws try to give shareholders more of a voice.
So, while antitakeover defenses aren’t going away entirely, companies must be more careful about which ones they use. They have to balance protecting the company with keeping shareholders happy.
