Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. There are several ways that two or more companies can combine their efforts. They can partner on a project, mutually agree to join forces and merge, or one company can outright acquire another company, taking over all its operations, including its holdings and debt, and sometimes replacing management with their own representatives. It’s this last case of dramatic unfriendly takeovers that is the source of much of M&A’s colorful vocabulary.
Dawn Raid
During a dawn raid, a firm or investor aims to buy a substantial holding in the takeover-target company’s equity by instructing brokers to buy the shares as soon as the stock markets open. By getting the brokers to conduct the buying of shares in the target company (the “victim”), the acquirer (the “predator”) masks its identity and thus its intent. The acquirer then builds up a substantial stake in its target at the current stock market price. Because this is done early in the morning, the target firm usually doesn't get informed about the purchases until it is too late, and the acquirer now has controlling interest.
There are some popular ways by which a company can protect themselves from a predator. These are all types of what is referred to as "shark repellent".
Golden Parachute: This measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. Benefits written into the executives’ contracts include items such as stock options, bonuses, liberal severance pay and so on.
Greenmail: A spin-off of the term "blackmail", greenmail occurs when a large block of stock is held by an unfriendly company or raider, who then forces the target company to repurchase the stock at a substantial premium to destroy any takeover attempt. This is also known as a "bon voyage bonus" or a "goodbye kiss".
Macaroni Defense: This is a tactic by which the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a higher price if the company is taken over. If a company is in danger, the redemption price of the bonds expands, kind of like macaroni in a pot!
People Pill: Here, management threatens that in the event of a takeover, the management team will resign at the same time en masse. This is especially useful if they are a good management team; losing them could seriously harm the company and make the bidder think twice. On the other hand, hostile takeovers often result in the management being fired anyway, so the effectiveness of a people pill defense really depends on the situation.
White Knight: This is a company (the “good guy”) that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party (a “black knight”). The white knight offers the target firm a way out with a friendly takeover.
Source: http://www.investopedia.com
Veena Vishwanathan
Globsyn Business School
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