Anti-Takeover strategies
Anti-Takeover
Measure' Measures taken on a continual or sporadic basis by a firm's management
in order to prevent or deter unwanted takeovers.
Golden Handcuffs
Golden handcuffs are financial incentives designed to keep
talented employees from leaving a company. Golden handcuffs can take several
forms.
For
example, golden
handcuffs may entail deferred compensation, under which pay for past services are
postponed to some future date. Golden handcuffs can also involve stock options, which the executive cannot exercise
until after some length of service to the firm. Another form of golden
handcuffs is restricted stock, which is transferred to the executive but
remains subject to forfeiture if the manager leaves the firm at an early date,
or does not reach certain performance goals.
Golden handcuffs are also sometimes part of
an anti-takeover strategy adopted in mergers and acquisitions. Under this
golden handcuffs scenario, key staff immediately become vested in stock options once the company is taken over. With
their golden handcuffs thus removed, many key executives will want to quit the
firm, leaving the new owners without the experienced talent they need to run
the company. This unlocking of golden handcuffs serves as a poison pill to
discourage takeover attempts.
How it works (Example):
Golden
handcuffs may come in
the form of lucrative commissions, generous bonuses, employee stock options, or other financial
compensation; all provided to a talented employee as an incentive to keep them
from moving out of the company.For example, let's assume that John is the CFO of Company XYZ. John is very talented and capable, and Company XYZ knows that it would be very time-consuming and expensive to hire a new CFO if John were to leave.
The labor market for CFOs is very tight at the moment, meaning that John has a lot of options at other companies and is probably getting some interest from other firms.
To keep John at Company XYZ, the board of directors decides to give him some golden handcuffs: a $50,000 stay bonus that he must return if he leaves the company in the next 18 months. John is actually free to leave at any time, but if he does, he won't get to keep the $50,000.
Why it Matters:
Golden
handcuffs are a tactic to retain talent. They are more common in tight labor
markets or for jobs requiring highly specialized skills. However, they are also
very expensive, and although they can be less expensive than the cost to
replace a particular employee, golden handcuffs often receive scrutiny from
shareholders and directors.
Impacts
When offered, golden handcuffs are extremely
tempting as they usually are of great value compared to the employee's annual
salary. The experience that follows an agreement of this sort may be draining
and abhorrent, which is why the contract must be thoroughly analysed and
thought about until an intelligent conclusion or compensation, that benefits
both the company and the employee, is agreed upon. Often employees feel the urge to remain
within the company they've been working with, even though it may not seem like
the smartest choice, objectively, because of tradition, relationships or a
simple feeling of belonging. When different opportunities are offered to an
employee, generally the choice is made by a mix of objective and subjective
views, where he or she must prioritise every aspect of their opportunities in
order to result with a beneficial solution. These sort of agreements might
potentially impose penalties if the employee decides to leave the company
before the contracted date, such as the repayment of bonuses. Often included in
these contracts are non-disclosure
agreements (NDAs),
where the employee is prohibited to communicate sensitive corporate
information, and non-compete clauses, where working for competitors is
forbidden for the leaving employee.
Structure
Top talent is usually quite rare, so
companies often negotiate deals in order to hold on to key employees. Golden
handcuffs constitute one of several ways to stop companies' key employees
leaving, making it essentially financially unprofitable for them to walk away
from their employers. Such deals are usually done with stock options, phantom stock or deferred payments. Phantom stock usually
gives the best results, as it gives an employee of a company using the
technique a motive for staying with the company and making it grow, since the
stock increases in value alongside the company. To create a contract that
benefits both the employee and the company, a legal team should be contacted in
order to discuss available options, and key employees should be distinguished
from others.A funding mechanism should be put in place
by the company (if privately held), where obligations are present. Tax
repercussions should be minimised for the money set aside, usually using
insurance as main funding mechanism. If designed perfectly, the corporation can
manage to receive all its money back after paying the employee.
Golden parachutes
The Golden
Parachute is an agreement between the company and the top executive(s),
that he will be paid lucrative benefits in the event when a company is taken
over by the other firm, and his employment gets terminated, as a consequence of
merger or acquisition.
In other words, golden parachute is a clause in the
employment contract, generally of top key executives, that employee will
receive certain significant benefits as an inducement for early employment
termination from the company due to a takeover. Benefits given to the employees
include stock options, severance pay, cash bonuses or other benefits.
The golden parachute is a disputed concept.
Supporters believe that this clause helps in hiring or retaining the top level
executives, due to the lucrative benefits attached to it. These benefits enable
an individual to remain objective in the firm, in case a firm is involved in a
merger or takeover activities.
Also, the golden parachute contracts can be used as
an anti-takeover measure taken by the company to discourage the takeover or a
merger by any other firm, due to the huge cost associated with these contracts.
But however, opponents believe that it is the legal
duty of every employee (including top executives) to act in the best interest
of the company and, therefore, should not be given additional benefits to
remain objective and perform activities that are advantageous for the company.
Also, the top executives are already paid handsome salaries and should not be
given any extra benefits in case of their early termination from the company.
Golden
parachutes are contracts given to key executives and can be used as a type of anti-takeover
measure, often collectively referred to as poison pills, taken by a firm to
discourage an unwanted takeover attempt. Benefits may include stock options,
cash bonuses and generous severance pay.
A
golden parachute consists of substantial benefits given to top executives if
the company is taken over by another firm and the executives are terminated as
a result of the merger or takeover. Golden parachutes are contracts given
to key executives and can be used as a type of anti-takeover measure, often
collectively referred to as poison pills, taken by a firm to discourage an
unwanted takeover attempt. Benefits may include stock options, cash
bonuses and generous severance pay.
Golden parachute clauses can be used to define the lucrative benefits that an employee would receive if he is terminated. The term often relates to the terminations that result from a takeover or merger.
Poison pill
A poison pill is a
tactic utilized by companies to prevent or discourage hostile takeovers. A
company targeted for a takeover uses a poison pill strategy to make shares of
the company’s stock look unattractive or less desirable to the acquiring firm.
There are
two types of poison pills:1. A “flip-in” permits shareholders, except for the acquirer, to purchase additional shares at a discount. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.
2. A “flip-over” enables stockholders to purchase the acquirer’s shares after the merger at a discounted rate. For example, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.
BREAKING DOWN 'Poison Pill'
The term
poison pill is the common colloquial expression referring to a specially
designed shareholder rights plan. A defensive tactic enacted by a
company’s board of directors, poison pills, at least, cause an aggressive
takeover plot to be rethought. At most, a poison pill may deter a takeover
altogether.
History and Functionality
In regard to
mergers and acquisitions, poison pills were initially
constructed in the early 1980s. They were devised as a way to stop bidding
takeover companies from directly negotiating a price for the sale of shares
with shareholders and instead force bidders to negotiate with the board of
directors.Shareholder rights plans are typically issued by the board of directors in the form of a warrant or an option attached to existing shares. These plans, or poison pills, can only be revoked by the board. Since their inception, poison pills have formulated into two types with the flip-in variety being the most common.
An Example
Flip-in
poison pills may hold an attached option that permits shareholders to buy
additional discounted shares if any one shareholder buys more than a certain
percentage, or more, of the company’s shares. For example, a flip-in poison pill plan is triggered when a shareholder buys 25% of the company’s shares. When it is triggered, every shareholder, minus the holder who purchased 25%, is entitled to buy a new issue of shares at a discounted rate. The greater the number of shareholders who buy additional shares, the more diluted the bidder’s interest becomes and the higher the cost of the bid. If a bidder is aware such a plan could be activated, it may be inclined not to pursue a takeover without board approval.
THE NET EFFECTS OF POISON
PILL STRATEGIES
The net
effect of a poison pill strategy is to make it prohibitively expensive for an
acquirer to buy the control of a company. The underlying assumption is that the
board will always act in the best interest of the shareholders, a view that is
explicitly rejected by agency theorists. Agency theorists have argued that the
practice of allowing management to adopt poison pill strategy has reduced the
number of potential offers and actual takeovers. In doing so, they have
protected incumbent management at the expense of shareholders. It is argued
that poison pills have the effect of perpetuating inefficiencies and poor
management that ultimately is reflected in lower stock values. Boards of directors invariably argue that poison pill strategies have exactly the opposite effect on stock values. They help maintain their independent decision making power to run their companies in the best interests of the shareholders. Poison pill strategies also provide bargaining strength to the board in order to extract the most value for the stock from a potential acquirer.
While there are merits to the arguments on both sides, an efficient allocation of resources through merger and acquisition activities can only enhance shareholders' wealth no matter how hostile the tender offers of corporate raiders. Many of the defensive tactics of management should be opposed by the shareholders as they might cause a loss of their wealth, although other defensive actions-for example, by soliciting competitive bids-can increase their wealth.
'White Knight'
A white
knight is an individual or company that acquires a corporation on the verge of
being taken over by a force deemed undesirable by company officials, otherwise
known as a black knight. While the target company doesn't remain independent, a
white knight is viewed as a preferred option to the hostile company completing their takeover. Unlike a hostile
takeover, current management typically remains in place in a white knight
scenario, and investors receive better compensation for
their shares.
BREAKING DOWN 'White Knight'
The white knight is the savior of a company
in the middle of a hostile takeover. Often, company officials seek out a white
knight – sometimes to preserve the company's core business, and other times
just to negotiate better takeover terms.
An example of the former can be seen in the
movie "Pretty Woman" when corporate raider/black knight Edward Lewis,
played by Richard Gere, has a change of heart and decides to work with the head
of a company he'd originally planned on ransacking.
Billionaire
Patrick Soon-Shiong has been deemed as a white knight for his $70.5 million
investment in May 2016 into Tribune Publishing, a newspaper company that is
currently fending off a takeover attempt by Gannett Co., the United States' largest
newspaper company by daily circulation. Soon-Shiong's investment makes him
Tribune Publishing's second-largest shareholder.
Hostile Takeovers
A few of the
most hostile takeover situations include AOL's $164 billion purchase of Time
Warner in 2000, Sanofi-Aventis' $24.5 billion purchase of biotech company
Genzyme in 2010, Deutsche Borse AG's blocked $17 billion merger with NYSE
Euronext in 2011 and Clorox's rejection of Carl Icahn's $11.7 billion takeover
bid in 2011.Successful hostile takeovers, however, are rare; not a single takeover of an unwilling target has amounted to more than $10 billion in value since 2000. Most of the time, an acquiring company raises the price per share it is offering until shareholders and board members of the targeted company are satisfied. It is especially hard to purchase a large company that does not want to be sold. Mylan, a global leader in generic drugs, experienced this when it attempted to purchase Perrigo, the world's largest producer of drugstore-brand products, for $26 billion in 2015, but it was turned down. A company such as Perrigo does not need the help of a white knight when put into a hostile situation.
In addition to white knights and black knights, there is a third potential takeover candidate called a gray knight. A gray knight is not as desirable as a white knight, but it is more desirable than a black knight.
