Mergers and acquisitions : The key common antitakeover measures.



A merger occurs when 2 firms combine to form a single company.

The primary motives for mergers are (1) synergy, (2) tax considerations, (3) purchase of assets below their replacement costs, (4) diversification, and (5) gaining control over a larger enterprise.

In most mergers, the acquiring firm initiates action to take over the target firm.

In a business environment in which the hostile takeover has become an acceptable mode of behavior, it is equally important to have a defensive strategy as it is to have an acquisition strategy.

For the firm that wishes to remain independent, the formation of antitakeover measures is essential. The first step in the process is the determination of the vulnerabilty of a firm to a takeover.

The second step is to implement several defensive measures to remain independent.

Defensive measures fall into six categories : control, corporate restructuring, greenmail, poison pills and puts, legal defenses, and golden parachutes.

The most common antitakeover measures are :

1. « Poison Pills » which include acts of target management whose purpose is to make the target firm less appealing to the acquiring firm.

2. « Golden Parachutes » which refer to the compensation to the top management of the target firm in the event that the target firm loses control.

3. « Scorched Earth Strategy » : The sale of a profitable division or other prized assets in the target firm in order to make it less appealing to the acquiring firm.

4.  »Targeted Repurchases » or « Green Mail » : The purchase of the shares of the target firm from the acquiring firm at a premium price. A condition of the purchase is that the potential acquirer leave the target firm intact.

5. « Changes in the Corporate Charter » or « Super Majority Provision » : The corporate charter contains the laws that govern the firm, and includes provisions that govern the transfer of control. The corporate charter can be changed so that a large majority, say 80% of the shareholders must approve the merger. Because it is difficult for any group to acquire such a large percent of approval, takeovers become less likely to occur.

6. « Staggered Board » : The classification of the board of directors into groups such that only one group is reelected each year. The acquiring firm can therefore not quickly control the board of the target even after obtaining a majority of the shares.

Here’s our advice :

When it comes to Corporate Restructuring and Takeovers, a significant body of evidence indicates that « polish doesn’t change quartz into a diamond » !…

So, better to ask twice than to lose your MONEY once …