Hostile Takeovers - The use of Attack and Defence Strategies

A Literature Review of possible theoretical approaches

Doctoral Thesis / Dissertation 2011 41 Pages

Business economics - Accounting and Taxes


Table of Contents

Executive Summary

List of Figures

1 Introduction
1.1 Scope and Classification of the topic
1.2 Background
1.3 Objectives
1.4 Structure

2 Literature Review
2.1 Motives for hostile takeover attcks and anti-takeover defences
2.2 Attack and Defence Strategies
2.2.1 Introduction
2.2.2 Attack Strategies Introduction Tender Offer (Saturday Night Special) Proxy Fight Dawn Raid
2.2.3 Defence Strategies Introduction Golden Parachutes Silver Parachutes Poison Pills Staggered Board People Pill Capital Structure Changes Crown Jewels Greenmail Supermajority Macaroni Defence White Knight Pac-Man-Defence

3 Conclusion
3.1 Limitations and Scope for further Research
3.2 Conclusion


List of Figures

Figure 1 Global M&A Volume from 1985 to 2008, Source: Thomson Financial Se curities Data (2009)

Figure 2 The proportion of hostile takeovers from 2003 to 2007, Source: Thomson Financial Securities Data (2009)

Figure 3 Timeline of a hostile takeover, Source: Toolsema (2007)

Executive Summary

The attack and defence strategies are of critical importance for the situation of a take- over-bid from the view of the target company or the investor (raider). They can be crucial factor whether the acquisition is successful or not. Several strategies are dis- cussed and are evidenced on the basis of practical examples. Of special importance is the development of the bid premia during the takeover process and the impact to the shareholders wealth. It can be observed that through decades and several takeover waves in the 20th century specific defence strategies pointed out as favourites in use for target managers. This project reviews the motivations for hostile takeovers, struc- tures the random literature in this field, discusses the effects and impacts of popular attacks and defences and showcases several high-profile takeover bids.

1. Introduction

1.1 Scope and Classification of the topic

As we will see below hostile and friendly takeovers are part of Mergers & Acquisi- tions (M&A). A hostile takeover (also called unfriendly takeover) is an unwelcome bid which was strongly resisted by the target’s firm1 managers2. Usually, it is carried out against the wishes of the management. Wirtz (2006) and (Vogel, 2002) mention the view of the so called stakeholders3 is not significant for a bid to be classified as friendly or unfriendly, otherwise almost every bid would be hostile because the ex- perience shows that stakeholders are pessimistic by nature to takeovers. On the other hand, a friendly takeover occurs if the two companies, the raider and the target, work together because the takeover is perceived as beneficial. In the literature (Brennan et al, 2010; Eckbo, 2009) a hostile bid is one in which the initial offer is opposed by tar- gets management. Moreover, an unwelcomed bid is usually aggressively and public rejected by the management of the target. When a hostile bid is announced, the share- holders of the target firm have to evaluate whether to accept or to reject the offer. Fur- thermore, it is to mention that Wirtz (2006) points out that the moment in which the bid turns to be hostile is still unclear. Is the simple rejection of the target’s manage- ment enough? Or should defence strategies be introduced, for the bid to be classified as hostile? According to (Eckbo, 2009) the definition of target ‘hostility’ used in the main literature probably captures plenty of targets that are ready to negotiate with or without introduced defence strategies.

In contrast to friendly takeovers, when the bidder’s proposal receives a positive reac- tion from the target’s CEO, hostile bids are undesirable offers that challenge the stra- tegic direction and the leadership of the company. (Pearce II and Robinson, 2004)

Hostile takeovers can be useless for the target firm and they can be risky for the raider as well. For instance the acquiring firm may not be able to obtain certain relevant information about the target.

1.2 Background

The hostile takeover techniques are part of the Merger and Acquisition (M&A) activities which could be important for companies in relation to a strong strategic position in the future. Furthermore, the intensity of M&A markets is an indicator for marketactivity and business-forecast. In the last century we saw a quick and large performance in the M&A market with ordinary growth in the last two decades till the recession after the dotcom crisis in 2001. (Martynova and Renneboog, 2008)

As we can see in figure 1, the global M&A volume increased significantly since 1985. A clear trend of M&A waves is identified in the years 1989, 2000 and 2007. Mar- tynova and Renneboog (2008) examine all M&A waves in the last century. A steep in- crease started in 1995 while because of the crisis in 2001 there was a downturn in the global volume. However, the M&A market recovered quickly till the financial crisis started in 2008.

illustration not visible in this excerpt

Figure 1: Global M&A Volume from 1985 to 2008 (Thomson, 2009)

It is to assume that M&A’s are boosted by the progress of globalisation. Furthermore, they are positively influenced by good economic conditions. On the other hand weak economic conditions during and after crises renewed the interest in takeovers as growth strategy. Takeovers usually occur in periods of economic recovery following a market crash or depression caused by war, energy crisis etc. (Martynova and Renne- boog, 2008) Weaker competitors became more vulnerable to attacks because of declin- ing performances and therefore falling stock prices. Thus, strengthens companies with high cash reserves or low borrowing costs to acquire other corporations at discounted prices. (Pearce II and Robinson, 2004)

The proportion of takeovers is on the highest level of the last decades. With a total value of $ 1.75 trillion in the first three quarters in 2010 the market indicates an increase of 21% in relation to the last year. (Wong, 2010)

Hostile takeovers are part of the M&A activity. Figure 2 indicates the part of hostile takeovers in relation to the global M&A volume. It can be said that the hostile part is quite small in compare to the whole volume. However, the proportion is increasing constantly. This is a fact that indicates the growth potential of hostile takeovers. In 2003 the proportion of hostile takeovers was approximately 8.8% while in 2006 18.2% and in 2007 16.7%.

illustration not visible in this excerpt

Figure 2: The proportion of hostile takeovers from 2003 to 2007 (Thomson, 2009)

The hostile bids increased from 2.8% in 2009 up to 8% in 2010 as part of the whole M&A volume. According to Wong (2010) this development is related to the hope of the CEOs that the crisis is now endured and the expectation of better economical times - which are not the time to sell - motivates them to defeat a friendly offer. Further- more, it is to say that not every hostile bid is successful. According to Wirtz (2006) just 40% of all hostile bids are of success. On the other hand 33% of hostile bids are defended and in 27% of the cases the target company is acquired by a third party.

1.3 Objectives

In response to this active market for corporate takeovers showed above, companies have devised an array of strategies to defend themselves against unwelcome takeover attempts.

This paper provides large sample of strategies for hostile bids and antitakeover provi- sions. The literature is full of uncommon and unstructured defence and attacking strategies. Furthermore, these strategies are named in different ways. For instance, Sokolyk (2010) is using antitakeover provisions, defence strategies and takeover deter- rents as synonyms. On the other Chakraborty (2008) is using for defence strategies terminologies such as poison pill, shark repellent, anti- takeover amendments and anti- predatory defences. While analysing the literature it seems confusing and complicated because different terminologies are used for the same strategy and the same circum- stances. This project tries to provide a clear and structured view to all theoretically possible strategies for hostile takeovers which are mentioned in the most common lit- erature in this area. However, there are different strategies which are very similar to each other. We will emphasize in this work to the most common in the literature. Therefore, the main and most important strategies will be underlined by hostile take- over case studies from practice. Generally, these strategies are used by raiders all over the world since decades. Even though, through the years, legal frameworks changed.

Some strategies became out of line with local legal requirements. In this work we will not analyze the legal aspects and the legal conformity of the strategies. Nonetheless, we will marginally mention some rules within the case studies. This work emphasizes on the technical opportunities for raider and target companies’ CEOs. We will give practical examples from the past. The data and information is mainly carried from sources like financial and business newspapers, journals and magazines which re- ported about specific hostile takeover circumstances in the past. Further, we will break down the strategy used by the CEOs of the defending companies and then indicate the results these measures had. We decided to choose worldwide known hostile takeover bid cases which were more or less successful and in which different strategies were used.

Hostile takeovers are seen as an important external disciplinary mechanism by advocates of the market of corporate control. (Schoenberg and Thornton, 2006) Therefore, to provide a competent analysis of the whole subject we will have a look to the motives for such hostile takeover attacks and defences.

The main data and literature used for this project is mainly from the last 15 years. According to Sokolyk (2010) a sample period prior the 1980s cannot be regarded usefully as evidence for today’s environment because the prevalence of hospitality in takeovers decreased in the 1990s. Moreover, legal and structural developments have changed the importance and relevance of many takeover strategies.

1.4 Structure

This proposal is organized as follows: Section 2 gives a literature review in which the motives for hostile takeovers and its defences are examined. Furthermore, section 2 explains single, theoretical possible, attacking and defending strategies and their im- pact in the takeover process. Section 3 provides limitations of the literature and the whole analysis and it gives a perspective for further research. Furthermore, a final conclusion is given.

2. Literature Review

2.1 Motives for hostile takeover attacks and anti-takeover defences

Hostile Takeovers have individual and specific reasons. Even though, they can be classified. Kerler (2000) distinguishes between rational and irrational motives, whereby rational motives are measured by maximisation of economic figures within a corporation such as market share, diversification, synergetic and profit figures. Transactions became more and more international because of globalization. Compa- nies are acting worldwide and this means that they are acquiring multinational. In to- day’s dynamic economic environment, companies are often faced with decisions con- cerning these actions. The primary aim of firms’ management should be to maximize shareholders value.

The motives for hostile attacks are for instance that sometimes a hostile bid can be pushed through much quicker and with much better conditions than a friendly bid which has to be well negotiated. Furthermore, the bidding company intends to increase revenue and to achieve higher growth by entering new markets and businesses and so to achieve synergetic gains. A company may seek to expand product range, geographic scope and customer base. Or it might want to diversify horizontally or vertically into related or unrelated product markets, pursue undervalued assets or manipulate finan- cial indicators. (Pearce II and Robinson, 2004) Moreover, the bidders might intend to increase market share and so to reduce competition and overcapacities in the industry. Schoenberg and Thornton (2006) argue that these reasons are responsible for the global high activity in M&A market in the last decade.

Martynova and Renneboog (2008) analyze the profitability of takeovers. They assume that it is not entirely clear if takeovers create or destroy company value. In short-term when the bid is announced the firms’ value is increasing and imbibed by the share- holders, but in long-term over the first five years the share price performance is declining. However, this negative effect can be turned positive if an increase in market shares combined with synergetic gains is reflected in improvements of the operating performance.

According to Zdral (2007) Private Equity firms and Hedge Funds are using hostile takeovers just for investment purposes. They are buying a whole corporation and then they start to sell single business lines or parts because they can achieve a higher price with single sales than selling the corporation in one transaction.

The attacking motives for unfriendly and friendly acquisitions are almost similar. Whereby, the defending motives differ significantly because in hostile takeovers the corporations do not want to be acquired. Motives for defending a hostile bid can be less, because usually the acquiring firm pays a premium, for the shares, which is above the current share price. This fact encourages the shareholders to accept the hostile bid. Franks and Mayer (1996) provide in their paper empirical evidence that in hostile bids there are larger asset disposals and bid premiums. Regularly, the bidding company of- ten accrues debt to make the bid or pays above the market value for the stocks. The debt created because of the takeover can be later slow down growth and the consolida- tion can result in layoffs. Furthermore, the new management may not understand the business model, the working environment or the technology.

In practice, the main reason for management the reject the initial offer of the bidding firm is because they speculate for a better alternative offer and so to raise takeover premiums and to increase shareholder’s wealth. (Ryngaert and Scholten, 2010; Schoenberg and Thornton, 2006) Furthermore, Schoenberg and Thornton (2006) found that in such bid defences where hostile bidders are under pressure to present their best offer, shareholder wealth increases by 9% - 14% in compare to friendly takeovers.

Most bids are entirely rejected because the target wants to defend its independence or because the shareholders might fear that the deal will reduce the value of the company or put in danger of going out of business.

A really good researched area in the literature in this subject is the role of targets ex- ecutives when a hostile bid appears. Pearce II and Robinson (2004) define in their study two opposing views of executives’ motivation for defending against hostile takeovers. The first view is the defences to promote the interest of shareholders by raising takeover premiums, improving management and protecting the firm’s long- term strategy. The second view includes that the executives implies defences just for self-interest because they want to protect their jobs and maintain their power position. “Are the executives trying to save their jobs at the expense of wealth gains for their shareholders?” (Pearce II and Robinson, 2004) So the CEOs are trying to improve own well-being and wealth. The executive of the bidding company tries to get the best re- turns from the price-value relation and to earn personal and organizational gains. In this case he enjoys increased job security as evidence that he can manage a larger and more prestigious company. As showed in Pearce II and Robinson (2004) and Franks and Mayer (1996) the executives’ turnover is significantly higher after in unfriendly takeovers than in friendly ones. At the same time, the CEO of the acquired firm will lose power, status and even he’s job. It is cited in Pearce II and Robinson (2004) that “if the bid is prompted by the target’s recent poor performance, then the hostile take- over has again served as the market’s most powerful mechanism for disciplining ex- ecutives”. Similar views are represented in Angwin et al (2004); Franks and Mayer (1996); Jenkinson and Mayer (1994) and Schoenberg and Thornton (2006) who pro- vide evidence that approximately 70% of the targets CEOs are replaced after a hostile takeover.


1 The target firm is also called in this paper: target, acquire, victim. We also use several synonyms for attacking companies such as bidder, aggressor, predator, acquirer, raider etc.

2 The term manager used in this project is referred to the higher management of a company such as executives, board of directors and other managers within the corporation with decisional power.

3 Stakeholders in this relation are in first line the employees’ then the suppliers and the other parties in firm’s direct environment.


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University of Westminster – Westminster Business School
M&A Merger & Acquisitions Hostile Takeovers Attack Strategies Defence Strategies takeover bid Motives for Hostile TakeoversAnti-Takeover Tender Offer Saturday Night Special Proxy Fight Dawn Raid Golden Parachutes Silver Parachutes Poison Pill Staggered Board People Pill Capital Structure Changes Crown Jewels Greenmail Supermajority Macaroni Defence White Knight Pac-Man Defence




Title: Hostile Takeovers - The use of Attack and Defence Strategies