Investment Insight: Takeovers and takeover defence tactics
Nick Ryder, NAB Private Wealth Investment Strategist, explains takeover and defence tactics used by listed companies.
Takeover tactics aim to acquire the target company as cheaply and quickly as possible, while defence tactics aim to prevent a change in control of the company or maximise the price for shareholders.
Takeover and takeover defence tactics differ depending on the country where the target company is domiciled and the exchange where its securities are listed. This is because of the different laws, rules and market practices in the different jurisdictions. In Australia, a party wanting to acquire more than 20% of the voting shares in a company must launch a full or proportional takeover offer to all shareholders on equal terms. Bidders can also gain control of more than 20% through mechanisms such as obtaining target company shareholder approval or by making a creeping takeover, which involves buying a 3% equity stake every six months.
Most acquirers will first attempt a “friendly” behind closed doors to the target company’s board and/or major shareholder. If the negotiations are successful the bidder will often try to deter a rival offer by attempting to prevent the target auctioning itself to other bidders by including “no-shop, no talk” clauses in the acquisition agreement and including a large “break fee” that the target pays to the bidder if the transaction is terminated or the bidder is gazumped.
If the friendly approach is unsuccessful, the acquirer may resort to a “bear hug” announcement where it publicly makes a non-binding offer to buy the company at a particular price and explains why the offer is compelling for target shareholders. This places pressure on the target company’s board to take the offer seriously or risk being removed at the next annual general meeting.
If the target company is not receptive to the offer and the bidder wishes to undertake a hostile takeover, there are a range of tactics such as a “dawn raid”, in which the bidder stands in the market, often when it opens in the morning, and buys as many shares as it can. In Australia, bidders will typically buy up to 20% and then follow through with a full on- or off-market takeover offer.
Target company boards will attempt to prevent a hostile takeover succeeding at a low valuation and will employ a range of defensive tactics. This will often rely on a public relations campaign using “killer bees” (i.e. law firms, public relations firms, and investment bankers) to criticise the offer as too low or too conditional and to discredit the acquirer. It could also attempt a pacman defence: switch roles and attempt a takeover of its hostile bidder.
In the United States, where takeover laws are less restrictive than in Australia, companies employ poison pill plans which dilute the hostile bidder’s voting power once its shareholding reaches a threshold. Shark repellents are similar but they are rules embedded in the company’s constitution that may require 90% of shareholders to approve a takeover or asset merger. Supposedly also designed to discourage hostile offers, are golden parachute contracts, where key personnel at the target company receive huge cash payouts where a change of control takes place.
Another defence tactic is the use of white knight – another bidder that is friendlier to the management team than the original hostile bidder. White knights are often provided favoured access to a target company’s books and management in order to encourage a higher offer and to foster a closer relationship with the target company’s management. However, not all rival bidders are white knights, some have uncertain intentions toward the target (grey knights) or some may have hostile intentions (black knights).