Anti-Takeover Defenses

Definition: A takeover is a form of an acquisition, wherein the company offers a bid for the purchase of a certain block of the equity of another company (target) to exercise complete control over its affairs. Practically, the acquirer must buy at least 51% or more paid up equity of the acquired company to enjoy full control over its operations.

A Takeover can either be friendly or hostile. When the management of the target company does not support such acquisition and the acquirer uses unfavorable tactics with an intention to buy a significant stake in the target company without informing the incumbent management, is said to have indulged into a hostile takeover.

In order to resist such takeover, the target company’s management and board of directors may adopt several anti-takeover tactics in one of the following forms:

1. A company might allot its equity shares or convertible securities on a preferential basis, thereby giving rights to the holder to convert its shares any time into the equity stake of the company, thereby, diluting the ownership in the firm and making the takeover unfavorable for the acquiring firm.
2. The target company may be amalgamated with the other company promoted by the same group to form a larger company. By doing so, the acquisition becomes expensive, and thus, the acquirer finds difficult to acquire the bigger firm relative to the smaller firm.
3. If the company finds, that it possesses certain valuable assets or other belongings which are the cause for such an acquisition, may sell those and become less lucrative for the acquiring firm. This strategy is called as “selling crown jewels.”
4. A company may seek help from its friends or find a white knight who might rescue the target firm from the clutches of the acquirer.

Apart from these anti-takeover defenses, there are several other defensive tactics adopted by the firms worldwide. These are as follows:

1. Poison Pill
2. Golden Parachute
3. Greenmail
4. Pacman Defense
5. Staggered Board
6. White Knight

However, when both the companies consider the takeover as a positive step taken towards the success of both the businesses individually, is said to have opted for a friendly takeover often called as an acquisition.