Page 44 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 25.f: Distinguish among pre-offer and post-offer
takeover defense mechanisms. READING 25: MERGERS AND ACQUISITIONS

Pre-Offer Defense Mechanisms MODULE 25.1: MERGER MOTIVATIONS

Poison pill -current shareholders have right to buy additional shares at extremely attractive prices (dilution and effectively increases cost to acquirer).
Poison put. These puts give bondholders the option to demand immediate repayment of their bonds if there is a hostile takeover.

Restrictive takeover laws. In the US firms may seek to reincorporate in a state that has enacted strict anti-takeover laws.

Staggered board (over 3-year term). A bidder can win at most one-third of the board seats and will need at least two years to gain majority control.
Restricted voting rights. Equity ownership above some threshold level (20%) triggers a loss of voting rights unless approved by the board of directors.

Supermajority voting provision for mergers. May require say 80% of votes in favor of a merger.

Fair price amendment. Restricts a merger offer unless a fair price is offered to current shareholders.
Golden parachutes. Give managers lucrative cash payouts if they leave the target company after a merger.

Post-Offer Defense Mechanisms
“Just say no” defense.

Litigation. Attack the merger on anti-trust grounds or for some violation of securities law.

Greenmail. A payoff to the potential acquirer to terminate the hostile takeover attempt.
Share repurchase. The target company can submit a tender offer for its own shares.

Leveraged recapitalization. The target assumes a large amount of debt that is used to finance share repurchases.

Crown jewel defense. Target decides to sell a subsidiary or major asset to a neutral third party.
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Pac-Man defense. Target can defend itself by making a counteroffer to acquire the acquirer.
White knight defense. A friendly third party that comes to the rescue of the target company.

White squire defense. Target seeks a friendly third party that buys a minority stake in the target without buying the entire company. The idea is for the minority stake to
be big enough to block the hostile acquirer from gaining enough shares to complete the merger.