Hostile Takeover (Hostile Merger) Defence Strategies

A target company has various options on how to fight a hostile takeover, which is also called a hostile merger. The target company generally obtains assistance of an investment banker and lawyer to ensure that fighting the hostile takeover will be successful. Below are the nine common hostile takeover defence strategies used by target companies.

Target companies may inform shareholders why the merger will be disadvantageous for the company.

Repurchase of stock is sometimes undertaken by companies to decrease the attractiveness of the target company for hostile takeover. Mergers can be attractive due to a company’s liquidity position. If the company has a lot of cash, it can be used to cover all or part of the debt undertaken to finance the acquisition. By using available cash to repurchase stock, the firm decreases its attractiveness as a takeover target. Moreover, repurchase of shares increases the price per share which makes hostile takeover more expensive.

Greenmail is another defensive strategy against hostile takeover. It leads to the target company buying a large bulk of shares from one or more shareholders which attempted a hostile takeover.

Another strategy to protect itself against hostile takeover is defensive acquisition. The purpose of such action is for the target company to make itself less attractive to the acquiring company. In such situations, the target company will acquire another company as a defensive acquisition and finance such acquisition with debt. Due to increased debt of the target company, the acquiring company, which previously planned hostile takeover, will likely lose interest in acquiring now highly leveraged target company. Before a defensive acquisition is undertaken, it is important to make sure that such action is better for shareholders’ wealth than the merger with the acquiring company which pursues a hostile takeover.

Finding a white knight is another hostile takeover defence strategy. It involves finding a more appropriate acquiring company that will take over the target company on more favourable terms and at a better price than the original bidder. White knights are seen as a protector of the target company against the black knight which is the acquiring company which attempted a hostile takeover.

Golden parachutes is another way to discourage hostile takeover. This strategy means including provisions in the employment contracts of top executives which will require a large payments to key executives if the organization is taken over. Nevertheless, the amounts to be paid are small relative to the size of the transaction. Therefore, this strategy may not be sufficiently effective on its own but will make the acquisition target less attractive.

Leveraged recapitalization is yet another way to deter hostile takeover. It refers to the distribution of a sizable dividend financed by debt. This increases the financial leverage of the target company and decreases its attractiveness.

The term poison pill was created by mergers and acquisitions lawyer Martin Lipton in the 1980’s and refers to a further hostile takeover defence strategy. It involves an arrangement that will make the target company’s stock unattractive for the acquiring company.

The poison pill strategy includes two main variations. Such variations are flip-in and flip-over. Flip-in tactic occurs when management offers to buy shares at a discount to all investors except for the acquiring company. Such an option is exercised when the acquiring company purchases a certain amount of the shares of the target company. Flip-over occurs where the Target Company will be able to purchase shares of the acquiring company at a discount after the merger is completed. This will decrease the value of the acquiring company’s shares and dilute the company’s control.

The poison pill can be effective in discouraging a hostile takeover and allows the target company more time to find a white knight. Yahoo is a famous example of a company that uses poison pill as a defence strategy. It will be exercised if any company or investor buys more than 15% of its shares without the approval of the board of directors.

The target company may also use the crown jewel defence strategy. Crown jewels refer to the most valuable assets and parts of the company. According to this strategy, the target company has the right to sell its best and most profitable assets and valuable parts of the business to another party if a hostile takeover occurs. This discourages hostile takeover as it makes the target company less attractive.

Pac-Man defence is a hostile defence strategy named after the popular arcade video game of the 1980’s. According to this strategy, the target company “turns the tables” and attempts to acquire an acquiring company which attempted a hostile takeover.

Although these hostile takeover defence strategies may be successful, there are costs such as transaction costs which are involved in undertaking them. Transaction costs may include hiring of investment bankers and lawyers. In making decisions whether or not to undertake any defence actions against hostile takeover, management needs to continue to act in the best interests of shareholders by keeping the maximization of the shareholders’ wealth as the main objective. is powered by Firmsconsulting is a training company that finds and nurtures tomorrow’s leaders in business, government and academia via bespoke online training to develop one’s executive presence, critical thinking abilities, high performance skill-set, and strategy, operations and implementation capabilities. Learn more at

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Types of Corporate Restructuring

Mergers and Consolidations

Consolidation is a type of corporate restructuring and occurs when two or more organizations come together to form a completely new corporation. This new corporation typically include all assets and liabilities of the combined separate companies. Consolidations usually occur between organizations of similar size.

Merger is also a type of corporate restructuring and occurs when two or more organizations merge into one. Organizations that merged into one usually maintain the identity of most important organization.

Merger often involves one or more smaller organizations merging into a larger organization and becoming part of that larger organization. Merging involves absorption of assets and liabilities of all firms merged. Mergers also can be called acquisitions, buyouts or takeovers.

Within a merger, the acquiring company (generally larger and more important company) usually will approach a target company (smaller and less important company) to arrange a merger.

Sometimes, however, the target company may approach acquiring company. The key outcome that the acquiring company seeks from a merger is synergy, leverage, key staff, technology or even preventing a competitor from acquiring a particular company.

Government and mergers

Governments regulate mergers. The main concern of the government is to ensure that competition is not eliminated. This concern is especially relevant if one direct competitor attempts to acquire another direct competitor. Such a merger could result in higher prices for consumers and lower output of combined organizations (fewer product or service options or inferior customer service). If such a situation occurs then population may end up worse off than it was before the merger.

Mergers, of course, also may provide social benefits. Such benefits include economies of scale and scope, better utilization of resources, higher output and improved quality.

Therefore, government usually prohibits only those mergers in which anticompetitive disadvantages outweigh social benefits.

Hostile and Friendly mergers (takeovers)

Hostile merger (hostile takeover) usually occurs when the acquiring company approaches target company but management of the target company or the board of directors of the target company do not support the proposal for acquisition. In such a situation, the target company may take actions to make it harder or impossible for the hostile merger to take place by executing hostile merger defence strategies.

Acquiring company then attempts to obtain the required amount of shares in the market place via tender offers. Tender offers refer to formal offers made to the shareholders in the market place to obtain a certain amount of shares at a given price which is above the current market price.

The acquiring company may also undertake a creeping tender offer by silently purchasing enough shares in the market place before making their intentions known.

Hostile mergers (hostile takeover) also occurs if the acquiring company approached shareholders directly without firstly approaching the management and board of directors of the target company.

Another way a hostile merger can occur is if the acquiring company engages in a proxy fight by trying to obtain support of enough shareholders to replace management with new management which will endorse the takeover.

Certainly hostile mergers are more difficult to undertake. The acquiring company may struggle to obtain a loan if it needs to borrow to finance a hostile takeover as banks usually are not supportive of hostile takeovers.

The acquiring company is also at greater risk under a hostile takeover because it cannot undertake an in depth due diligence of the target company and will have to rely completely on the publicly available information to make a decision to acquire a target company. Nevertheless, hostile takeovers also take place.

Friendly merger (friendly takeover) involves a situation where the acquiring company approaches the management of the target company with the proposal for acquisition. If management supports such an acquisition and if the board of directors sees a merger to be in best interests of shareholders, then the board makes such a recommendation to the shareholders. If shareholders approval is obtained then a friendly merger occurs and it is completed by the acquiring company obtaining shares in the target company.

Motives for mergers

Any action undertaken by business must be based on achieving the main objective of the enterprise which is the wealth maximization of the owners of the enterprise.

The main objective of a merger should be the same as the main objective of the firm. Namely, the maximization of the owners’ wealth by improving the share value.

There are two driving forces for mergers, which should be consistent with the main objective. They include strategic and financial reasons.

Under a strategic merger the performance of firms after the merger is higher than performance of firms before merger. The strategic merger involves economies of scale due to combining two or more firms to achieve greater productivity and profitability.

Financial mergers are conducted due to a perception by the acquiring company that the target company can be managed and structured better after acquisition. In this way the acquiring company anticipates to unlock unrealized value from the target company. Such mergers rely significantly on debt to finance acquisition. A leveraged buyout (LBOs) is an example of financial mergers. Strategic mergers are more prevalent than financial mergers. is powered by Firmsconsulting is a training company that finds and nurtures tomorrow’s leaders in business, government and academia via bespoke online training to develop one’s executive presence, critical thinking abilities, high performance skill-set, and strategy, operations and implementation capabilities. Learn more at

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