Take Over Defenses

Citra Aryani Dian Agustina Luna Mantyasih M Ratna Nugrahaningsih

What is it?

What is it?
Not all mergers are welcome During the 1980s, a variety of devices were developed to defend firms from unwelcome takeover proposals

 Periodic or continual measures a firm's management takes to discourage unwanted or hostile takeovers. One example of a takeover defense is the macaroni defense, in which the company issues a large number of bonds with the proviso that they must be redeemed at a high price if the company is taken over. It is also called an shark repellent. Anti take over defenses Corporate charter amendments Preventive measures Active measures

Why do it?

Why do it?
Target is resisting to get a better price Management of target judges that company will perform better on its own

How to do it?

How to do it?
Shark Repellant Legal existence

Corporate charter amendments

Classified boards Super majority provisions Fair price amendment Dual Capitalization

How to do it? Preventive measures

Poison pills Flip in plan Flip over plan Back end plans Dead hand provisions Poison puts Golden parachute Silver parachute Tin parachute

Active measures
Greenmail Standstill agreement White knights White squire Pac man defense

Restructuring

Poison Pills
A poison pill is a defensive strategy that involves a security with special rights exercisable by a triggering event. A flip-over is one types of poison pills which current shareholders of a targeted firm will have the option to purchase discounted stock after the potential takeover. The flip-in is a provision in the target company's corporate charter or bylaws.

Poison Pills
The dead-hand provision prevents an unfriendly acquirer from seizing control of the board and removing the pill. A back-end plan is a different variety of a poison pill. A back-end plan provides the target shareholders with rights. At the option of the targets stockholder, a right and a share of the targets stock can be exchanged for cash or senior debt at a specific price set by the targets board.

Poison Puts

Poison puts or event risk covenants give bondholders right to put, at par or better, target bonds in event of change in control Protect against risk of takeover-related deterioration of target bonds Place potentially large cash demands on new owner, raising costs of acquisition

Parachutes
Employee severance agreements that are triggered when a change in control takes place. Varieties : - Golden Parachutes - Silver Parachutes - Tin Parachutes

Golden Parachutes
Separation provisions of employment contract that compensate managers for loss of their jobs under change-of-control clause
Provision usually calls for lump-sum payment or payment over specified period at full or partial rates of normal compensation

Silver and Tin Parachutes

Silver parachutes
Provide less generous severance payments to executives

Tin parachutes
Extend relatively modest severance payments to wider coverage of managers including middle management, and in some cases, cover all salaried employees

Corporate Charter Amendments

Classified Boards
Divided into different classes

Preventing the entire board from

being replaced at the same time.

Delays effective transfer of control in take over

Example:
Suppose nine members in a group Divided into group of three Hostile bidder has to wait two annual meetings

Super Majority Provisions

Approval by large number of votes 2/3rd or 80% votes for merger approval The board has discretion in imposing the supermajority rule Difficult for someone to conduct a takeover by buying enough stock

Fair Price Amendments

Acquirer to pay fair price to shareholders of the firm State in form of minimum price or P/E multiple Use at two tiered bid by the acquirer

Dual Capitalization
A firm may issue shares with different numbers of votes per share Investors can purchase stocks, but they can't purchase control of the company Management retains the voting power

Active Anti-takeover Defenses

Greenmail
Buying back of share at premium Signing a Standstill Agreement

Standstill Agreement
Not to increase holdings for particular period Accompanied by targets agreement Prevents falling into hands of another bidder

White Knights
Another company more acceptable More favorable terms than original bidders Not to disassemble No layoffs

Hostile Firms Strategies

The Hostile Firm is making an offer more lucrative than the White Knight's, so that the shareholders consider rejecting the White Knight's bid. The Hostile Firm launches a takeover offer for the White Knight. This takeover offer is generally a hostile one.

White Squire
Target sells only a block of its stock to third party it considers to be friendly In return, white squire may receive: board seats, dividend, discounted shares

Pac-Man Defense
Highly aggressive defense technique Possible only if financial resources permissible May result into
May defend May end up extremely destructive High debts

Restructuring
Going private
Buying bulk of the shares

Sales of attractive assets

Making less attractive

Liquidating the firm

When liquidation is better than the bid

PRO-DEFENSE

Permasalahan

Apakah takeover defense menguntungkan atau merugikan shareholder dari perusahaan target?

Tujuan
Mengetahui: Pengaruh dari takeover defense ini terhadap perusahaan target, dimana dilihat dari kepentingan shareholder dan manajemen. Motivasi perusahaan target untuk melakukan takeover defense.

Uses of Takeover Defenses

Target management has to try to get a higher bid from bidder like buying cars or appliances -- negotiation is assumed to be important if target saw a good bid and took it without resisting at all they are likely to be sued by stockholders because they should have gotten an even better deal Benefits from using defenses are: (1) stall for more time to find a "White Knight" (2) directly compete with bidder (LBO, leveraged recap, Pac Man) (3) threaten high transaction costs (litigation, etc.) as part of bargaining strategy

Do pills poison operating performance? Morris G. Danielson a, Jonathan M. Karpoff b (2006)

Kinerja operasi sederhana meningkat selama periode 5 tahun setelah ditetapkan poison pill. Hal ini tidak konsisten dengan pandangan bahwa pil mendegradasi kinerja. Perlindungan yang ditawarkan oleh pil paling kuat ketika digabungkan dengan staggered board, perubahan kinerja juga tidak ada hubungannya dengan staggered board. Bukti ini melemahkan pandangan luas bahwa poison pill telah memberikan efek negatif terhadap kinerja perusahaan. Sampel data dari perusahaan yang melakukan poison pill selama tahun 1984-1992.

The Impact of Bid Defences in Hostile Acquisitions

RICHARD SCHOENBERG, DANIEL THORNTON (2006)

ksatria putih dan manajemen buyout sebagai takeover defenses yang paling efektif. Bila dilihat dari sisi takeover yang disetujui, hostile bid tidak hanya memberikan return yang lebih tinggi untuk pemegang saham target, tetapi juga memiliki probabilitas yang lebih rendah menghasilkan akuisisi selesai . Oleh karena itu, daripada menyetujui takeover, menolak tawaran pendekatan yang dapat melayani kepentingan kedua pihak akan lebih baik. Pemegang saham, dengan meningkatkan tingkat pengembalian saham, dan manajer, dengan meningkatkan kemungkinan bahwa status quo akan dipertahankan sebagai akibat dari tawaran gagal.

Hostile takeover defenses that maximize shareholder wealth

John A. Pearce II, Richard B. Robinson

Perusahaan menetapkan pertahanan terhadap hostile takeover untuk melindungi kemerdekaan mereka dan inisiatif manajemen, atau untuk membantu memastikan bahwa hostile bid ditekan untuk hadir menawarkan yang terbaik. Tantangan kritis bagi para eksekutif adalah untuk menentukan-untuk mengantisipasi serangan terhadap mereka yang perusahaan-strategi pertahanan terbaik akan membentengi investasi pemegang saham.

Case Study: Kraftbury

The Kraft Foods Inc. is the second largest food and beverage company in the world. The company headquarter is in Northfield, Illinois, United States. The Cadbury plc is a British confectionery and beverage company and second worlds largest confectionery manufacturer. The company headquarters is in City of Westminster, London, United Kingdom.

 September 2009, Kraft Foods Inc. made an offer to buy Cadbury. On a previous deal, Cadbury rejected the Krafts 10.5 billion pounds. The Kraft faces UK Takeover Panel deadline to increase its bid for the Cadbury shareholders. Now, The Kraft Foods Inc (KFT.N) agrees on a deal to buy Cadbury (CBRY.L) on January 19th, 2010 after four months of conversation for about 11.9 billion pounds or 19.55 billion dollars.

Analisis
Dalam mengembangkan aktivitas bisnisnya, Kraft dan Cadbury memiliki dua misi besar yakni pengusaaan pangsa pasar dan maksimalisasi profit. Kraft lebih berjaya di AS sementara Cadbury menguasai pasar Eropa. Cadbury lebih menonjol dalam hal bisnis permen karet terutama di Eropa dan Amerika Latin sementara Kraft memiliki lebih sedikit pengalaman dalam hal tersebut (Economist, 19 Januari 2010). Kedua perusahaan dapat saling melengkapi dalam hal jenis produksi dan wilayah pasar sehingga apabila terjadi akuisisi di antara kedua perusahaan ini, pangsa pasar Kraftbury menjadi lebih luas. Maksimalisasi perolehan profit akan terjadi menyusul terciptanya perluasan pangsa pasar. Kraftbury dapat memperkuat kapasitas sumber daya manusia, sumber daya teknologi, dan mampu mengembangkan ide-ide inovasinya. Meskipun Kraft membeli Cadbury dengan harga mahal, imbal hasil yang diraih akan jauh lebih besar terlebih kedua perusahaan harus menghadapi ancaman produk China yang merupakan produsen gula-gula terbesar kedua di dunia.

CEO Cadbury, Roger Carr: It was about management achievement, and the Kraft achievement relative to the Cadbury one was less. Therefore, you would only sell this business for the right price. (Reuters, 20 Januari 2010) CEO Kraft, Irene Rosenfield: Proses akuisisi ini justru akan menguntungkan seluruh pihak karena inilah saat yang tepat bagi dua perusahaan untuk bersama-sama menciptakan kerajaan confectionery and beverage terbesar dunia (Economist, 19 Januari 2010)