In this sixth and final episode of a six part series on corporations,
I'm going to discuss hostile takeovers.
This occurs when an acquiring corporation attempts to takeover another corporation,
with the target actively fighting the acquisition.
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Today we are going to examine the approaches corporations take to avoid hostile takeovers.
There are two ways that a corporation can be purchased.
The first approach has the acquiring board’s approval and both corporations work together
to make the deal work.
This is especially important if the government needs to provide its approval,
as when two large rivals seek to merge and there is some anti-trust concerns.
The second approach, which is what we're going to look at now, is called the hostile take-over.
As implied by the name, the target corporation does not want to be taken over and it may
it may create roadblocks to being acquired.
The hostile bidder can choose to purchase shares on the stock exchange,
but that will generally takes some time.
So what the hostile bidder usually does is to make a tender offer.
This is where they inform the shareholders, usually by running ads in business newspapers,
that they want to acquire the shares of the corporation
for a certain amount if they receive a certain percentage of the shares by a particular date.
For example, XYZ’s stock is trading for $40 per share.
Hostile bidder makes a tender offer, which provides that they will pay $50 per share
if they receive 50% of the shares by December 31st.
In other words, shareholders must tender their shares to the hostile bidder before that date,
but if the hostile bidder receives less than the 50% of the shares
then they do not have an obligation purchase any of the shares.
Given this premium for the shares, many shareholders will take the offer for fear that they may
lose out on a high price for the stock if the tender offer expires.
Some hostile bidders engage in tactics which are clearly abusive, but perfectly legal.
One of these tactics is called the two-tier tender offer.
Those shareholders that accept the offer by a certain date get offer number one,
while those who wait get something less desirable.
So, let’s go back to our $50 per share offer.
When 50% accept by the 31st, they get $50.
In a two tier tender offer, the hostile bidder agrees to pay $50 in cash
for all offers it receives by the 31st.
Which presumably is a good offer.
But anyone who comes in after that date
(the hostile bidder is trying to buy the entire corporation,
so it does have to buy all the shareholders out at some point).
So they say what we're going to do for everyone else, everyone who does not tender their offer,
they're going to get a $50 bond.
In other words a debt of the corporation.
This approach will get many people tendering their shares by the 31st
because if people have a choice the prefer cash over a bond.
$50 cash, $50 bond--I want my money now.
Alright, now let’s examine one approach to stop a hostile takeover.
This one's called greenmail. You can see it's like blackmail,
but green mail because we're dealing with cash.
Greenmail occurs when someone purchases a large block of a corporation’s stock and
claims they are going to take over the corporation.
The person that is doing this may have a bad reputation, and is called a corporate raider.
They may be the kind of person, who when they buy a company
they come in, they fire most of the employees.
They cut salaries. Certainly get rid of a lot of the nice perks.
And then they move a lot of the operations overseas.
The board of directors may choose to buy out this person
by paying him more than he paid for the stock.
It's kind of like blackmail.
"I will go away if you pay me some money.
Some corporate raiders have made lots of money through this technique,
And they do so even when they have no intention of actually purchasing the corporation.
They know that just purchasing a large block of stock will get the corporation to pay him money to go away.
Second, a corporation may adopt a poison pill plan to avoid a hostile takeover.
A poison pill is any technique that a board can use to make it very expensive for
another business to acquire it without its consent.
So if the hostile takeover goes through, then the acquiring company
also has to swallow the poison pill along with buying the company.
Let’s go through a few examples.
There are many, many techniques. I'm just going to give you a few of them,
just to give you a flavor. As you can imagine, there are a lot of people with a lot of ideas out there.
This list is clearly not exhaustive.
One, maybe you've heard about this, is called the golden parachute.
This is when the officers of the corporation receive an exorbitant payment if the corporation
is acquired in a hostile takeover.
For example, the CEO of this company, ABC, normally receives $2 million a year in compensation.
But if the corporation is acquired, he will receive a $50 million bonus.
A lot of money.
And that might be enough to keep another company from purchasing it.
It's not always self motivated, in the sense that the corporation doesn't want to be acquired.
Sometimes it's just the price you have to pay to hire a CEO.
You've got a CEO, let's say he's 50 years old.
As you get older it becomes increasingly harder to get those kinds of jobs.
So the CEO says, I'm willing to come and be your CEO.
I'm going to leave my other corporation and come work for you.
But I need some guarantee, that if something happens, I'm going to be compensated.
One thing is to demand a golden parachute payment.
The world changes, mergers happen.
If you want to hire me, I need this $50 million golden parachute agreement.
And, we saw it in the Disney case, mentioned in the materials.
Where they hired someone, who's coming from another corporation, who's very happy, making lot's of money.
He said, look, I'm leaving a lot of money at the table at this other corporation. I need a golden parachute.
Second type of poison pill is called the flip over rights plan. The flip over irghts plan.
Under this approach, all shareholders, except the hostile takeover bidder, receive the right
to purchase additional stock in the corporation at a heavily discounted rate.
The right can be exercised if a certain condition is met, such as the hostile bidder acquiring
20% of the corporation’s stock.
In this case, if the hostile bidder purchases 20% of the stock the other shareholders will
exercise their rights and the hostile bidder will find that he now only owns 5% of the corporation.
So again, that bidder then has to spend more and more money to try to control the corporation.
A third type of poison pill involves voting rights.
A corporation might issue debt or stock to all shareholders other than the hostile bidder.
This debt or stock may carry super majority voting rights, making it impossible for the
hostile bidder to control the corporation.
A fourth type of poison pill is called a back-end plan.
In this case, the back end plan, the corporation agrees to provide bonds to all shareholders,
other than the hostile bidder.
So if a certain triggering event occurs, such as the hostile bidder acquiring
20% of the corporation’s stock.
This guarantees that shareholders will get more value for their stock if the hostile
bidder is successful.
Here's an example: suppose that the hostile bidder is offering $30 per share for the stock,
which the board believes is woefully inadequate.
So the board offers bonds, to its shareholders, in the amount of $20.
So if the hostile bidder takes over, the hostile bidder will have to pay $30 in stock and $20 for the bond.
For a total of $50 per share.
Again, these are only a few of the possible techniques that corporations can use.
Today, many corporations have adopted these strategies, and others, to force companies interested in
acquisition to negotiate in good faith with the board of directors.
In other words, so that the corporation can get a good price for the shareholders.
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