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ANTI TAKEOVER DEFENSE

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3 FORMS OF TAKEOVER

NEGOTIATED/ FRIENDLY

OPEN MARKET/HOSTILE

BAIL OUT

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ANTI TAKEOVER DEFENSE STRATEGY

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TAKEOVER

DEFENSE

PREVENTIVE

POISON PILL

CORPORATECHARTER

AMENDMENTS

GOLDENPARACHUTE

ACTIVE

GREEN MAIL

STANDSTILLAGREEMENT

WHITE KNIGHTS

WHITE SQUARE

RECAPITALISATION

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PREVENTIVE ANTI TAKEOVER DEFENSE

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POISON PILL

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A poison pill is an attempt to discourage an acquisition by

making it more expensive to acquire a company, or by

reducing the value of the acquired business.

A strategy used by corporations to discourage hostile

takeovers. With a poison pill, the target company attempts to

make its stock less attractive to the acquirer.

For example, a company could have a poison pill that goes

into effect when a hostile bidder acquires 20 percent of the

company. Poison pills are usually set up to last for 10 years,after which they can be renewed or allowed to expire.

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TYPES OF POISON PILL

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Flip ± in

A "flip-in" allows existing shareholders (except the acquirer) to

buy more shares at a discount.

For example, the rights become exercisable to purchase the

target company's common stock at 50 percent discount frommarket price in the event the acquirer purchases more than,

say, 30 percent ownership in the target company. The acquirer

is precluded from exercising flip-in rights.

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FLIP ± OVER

A "flip-over" allows stockholders to buy the acquirer's shares

at a discounted price after the merger.

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CORPORATE CHARTER AMENDMENTS

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STAGGERED BOARD AMENDMENTS

It is a type of defense where the terms of the board of directors

so that only a few such as one-third of the directors may be

elected during any one given year

It requires share holder approval before they can be

implemented

Classified directors cannot be removed before their term

expires

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SUPERMAJORITY PROVISIONS

These provisions usually require that at least 80% of voting

shareholders approve of the takeover, as opposed to a simple

51% majority. Such a requirement can make it nearly

impossible for an acquirer to obtain enough votes approving

the takeover.

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FAIR PRICE PROVISIONS

It is a modification of corporations' charter that requires the

acquirer to pay minority shareholders at least a fair market

price for the company¶s stock.

-it is usually in terms of company¶s P/E ratio -it¶s a weak takeover defense

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DUAL CAPITALIZATION

R estructuring of equity into two classes of stock with different

voting rights

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GOLDEN PARACHUTE

Special lucrativecompensation agreementsthat the company provideto Top management

it may be used both as a preventive measure and asan active measure

It is triggered by some

predetermined ownershipof stock by an outsideentity

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EXAMPLE

1. Procter & Gamble's successful acquisition of Gillette- CEO,

James Kilts, received a golden parachute worth $188 million

2. Oracle's acquisition of Sun Microsystems- Sun CEO

Jonathan Schwartz will receive a severance package of about$12 million, and co-founder and chairman Scott McNealy will

get around $9.5 million

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ACTIVE ANTI-TAKEOVER DEFENSES

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GREENMAIL

It refers to the payment of a substantial premium for a

significant shareholder¶s stock in return for the stockholder¶s

agreement that he or she will not initiate a bid for control of

the company

Company example:

Disney & Saul Steinberg

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STANDSTILL AGREEMENT

An agreement between a target company and a potential

hostile acquirer whereby the acquirer agrees not to buy any

more of the target company in exchange for some

compensation. The compensation may be monetary; that is, the

company can simply buy off the acquirer. More commonly, it

involves some other incentive such as a seat on the board of

directors.

Company example:

Chrysel corporation

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WHITE KNIGHTS

Another company more acceptable

More favorable terms than original bidders

Terms required

Not to disassemble

No layoffs

EXAMPLE

EUROPEAN STEEL MAKER ARCELOR AND MITTAL

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WHITE SQUIRE

Target sells only a block of its stock to third party it considers

to be friendly

In return, white squire may receive: board seats, dividend,

discounted shares Preferred stock usually used in white squire transactions

because it enables board to tailor characteristics of stock as

described

EXAMPLE

WARREN BUFFET

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RECAPITALIZATION

PRINCIPAL FORMS OF RECAPITALIZATIONS

Share repurchase

Special dividend

Leveraged recapitalization

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Motivation behind Recapitalization

Enhance shareholder value

For e.g.

In 1997, coca-cola opted for buy-back of 8.3% of their equity thatraised the price of the scrip by a 42% in the New York stock

exchange

Distribute excess cash

For e.g

in June 2007 Guj.Amb. Earned 250 cr. On the sale of shares to

holder ind Investment ltd. In addition co. earned 325 cr. From salesof assets co. gave rs.1.30 per share of rs.2 each as special dividendand rs. 1.20 normal dividend total dividend is 2.50 on the face valueof rs. 2

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Thwart unwanted takeover threat

For e.g.

In 1985 attempted hostile takeover of union carbide

corporation by GAF corporation . To thwart the offer union

carbide offered its shareholders $ 20 per share in cash + $65 in debt securities . The entire package was valued $ 85.

Concentrate equity ownership

For e.g.

In the multimedia transaction in 1985 management

increased their ownership in the co. from 13% to 43% post

recapitalization

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Advantages of Recapitalization

Lowers companys cost of capital

Enhance shareholder value

Concentrates equity in hands of loyal shareholders

Effective means to distribute cash May signal stock is undervalued

Provides current return plus future upside

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Disadvantages

May result in over leverage and consequently severe financial

distress and bankruptcy

Increase in leverage may constrain operating and financial

flexibility May send negative signal in that the market may perceive the

recapitalization as a sign the company has few other

investment or growth opportunities

Masking financial ratios may cloud true financial

performance

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ESOPs

TYPES OF ESOPs

LEVERAGED

ULEVERAGED ESOPs LEVERAGEABLE ESOPs

TAX CREDOT ES

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REASON FOR ESOPs

GOOD MOTIVATOR

TO ATRACT AND RETAIN

OFFER REWARDS

RETIREMENT BENEFITS

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LITIGATION

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PAC-MAN DEFENSE

³Best Defense is a Good Offence´

It occurs when the Target makes an offer to buy the Hostile

company in response to Hostile bid for the Target Highly aggressive defense technique

Counter tender offer in response

Possible only if financial resources

May result into ± May defend

± May end up extremely destructive

± High debts

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JUST SAY NO

A strategy used by corporations to discourage hostile takeovers

in which board members reject a takeover bid outright.

The case of Paramount Communications vs. Time, Inc

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CROWN JEWELS

It is a strategy in which the target company sells off its most

attractive assets to a friendly third party or spin off the

valuable assets in a separate entity

unfriendly bidder is less attracted to the company assets

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RESTRUCTURING

Going private

± Buying bulk of the shares

Sales of attractive assets

± Making less attractive

Undertaking major acquisitions

± Draining its excess cash balance

Liquidating the firm

± When liquidation is better than the bid

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EXAMPLE

Punjab National Bank has been in the forefront of

restructuring

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