Corporate Takeover Defenses and Shareholder Values

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Navigating the waters of corporate finance and management can feel like a never-ending duel; each corporate action is a thrust and parry to avoid the proverbial sword of a hostile takeover. This makes hostile takeover defenses a crucial part of corporate strategy. The importance of understanding the elements of a corporate takeover as the target company as well as for shareholders cannot be overstated.

Though the world of corporate management and investment can be treacherous, the motivations of primary actors are typically clear: shareholders want to maximize profits and management wants to maintain control.

While a company generates substantial dividends and avoids public relations crises, these motivations typically align. But what happens when a corporate takeover puts these motivations in conflict? What preventative measures can be used to mitigate (or prevent) the damages?

How to Defend Against a Corporate Takeover

Corporate takeovers or hostile takeovers are often the subject of board meetings and Hollywood portrayals of cutthroat business dealings, but defenses against these takeovers are less widely known. There are several measures a company can take to prevent a hostile takeover—several of which may increase tensions between management and shareholders.

The balance between protecting internal control of company management and preserving shareholder interests may be the most important factor in implementing preventative measures—and may determine the short-term and long-term chance of survival for the company.

Expand Board Size

At the heart of every hostile takeover is one simple component: the takeover is against the will of management. With this in mind, management can structure its processes in such a way as to defend preemptively against corporate interference.

One way to defend against a takeover is to expand the board of directors in order to dilute individual votes. This method may not permanently prevent a takeover but it does make it more difficult for a hostile entity to acquire the votes necessary for sale.

Benefit: Makes it more difficult for a hostile entity to gain control.

Drawback: Requires implementation at a critical point in order to avoid takeover.

Initiate a Buyback Program

Another method of defense is to offer an aggressive buyback program. By offering to buy back stocks from shareholders, the company may compel internal sales and make things more difficult for an interfering company to capture a majority.

This approach is seen as being in the best interest of both the shareholders and management. By offering shareholders a higher price than market value, investors are incentivized to sell back stocks to the company rather than an outside buyer—reducing the likelihood of a hostile takeover.

Benefit: Reduces cash on hand and makes the company less appealing to a hostile entity. Limits shares available for acquisition.

Drawback: Must have cash on hand in order to make aggressive offer to shareholders. May trigger a PR crisis as it places hostile takeover potential in the spotlight.

Establish an Investor/Analyst Day

Providing information to shareholders is one of the most effective strategies for avoiding a hostile takeover. By establishing a day during which guidance and overviews are provided to help shareholders understand stock values—and why stocks may currently be undervalued—the company displays the long-term as well as the short-term benefits of investment.

Benefits: Investors are more likely to remain with a company and refuse sale when they are able to see the increase potential of shares in the long term.

Drawbacks: Lack of certainty. This approach provides little in terms of tangible data by which to determine if a takeover is imminent. Power is placed in the hands of shareholders without secondary mechanisms in place to alter the takeover trajectory.

Ill-Advised Measures

One piece of the hostile takeover puzzle that is rarely discussed is the danger of alienating current investors. If a company is able to stave off a hostile takeover but creates an irreparable divide between management and investors, then the battle for corporate control is far from over.

The following defenses are more drastic in nature, reducing the likelihood of a hostile takeover while also limiting the effectiveness of management.

Move Corporate Headquarters

One of the more drastic defense methods is to up and move the corporate headquarters to a state with more rigid anti-takeover regulations. By setting the headquarters in a jurisdiction that specifically places restrictions on hostile takeovers, management can avoid the immediate threat of a takeover.

Benefit: Prevent, possibly permanently, a hostile takeover.

Drawback: Alienate investors and place additional restrictions on corporate managers. This measure can be seen as underhanded by investors and may cause shareholders to lose faith in management. Additionally, relocating for the purpose of legal differences from one jurisdiction to another may provide protections from hostile takeovers at the expense of other regulatory differences. (e.g. there is a reason the majority of companies reside in Delaware)

Create a Staggered Board

Management can elect to have a staggered board for voting out directors. This piecemeal approach to leadership makes it more difficult—and establishes a lengthy time commitment—for a hostile takeover to move forward.

Benefit: This approach makes it more difficult for shareholders to vote out directors and replace them.

Drawback: This approach makes it more difficult for shareholders to change board dynamics when there is not a hostile takeover in mind. This method can be incredibly limiting to the governance of the corporation.

Adopt a Employee Stock Plan

An employee stock plan can have accelerated vesting in the case of a takeover. This can be retaining key personnel more challenging and therefore make a takeover riskier. This sort of defense is highly frowned upon. Similarly, a company can offer a preferred share class that converts to common shares in the case of a takeover, requiring the hostile buyer to buy more shares than otherwise necessary.

Benefit: Removes incentives for hostile entities to take over the target company.

Drawback: Alienates investors. Places the entire company at risk. Makes shares valueless if takeover occurs.

Alternative

At the beginning of every storytelling session, a writer must ask: what is the story about and why do we care? This approach to narrative is echoed throughout the corporate world; it is the foundational principle of branding and shareholder activism.

The story of preventative measures to avoid a hostile takeover is often exactly that: a story. Management must understand the needs and desires of shareholders in order to implement policies and procedures which serve to both defend against unwanted interference and retain the trust and support of investors.

Often, this balance comes down to presentation. If management can convince shareholders that there is more value in keeping stocks than in selling them, a takeover can be averted. Likewise, if management is able to sink the prospect of a sale by using divisive measures, celebrations over avoiding a takeover may be short lived.

Each element of a company’s preventative measures should be focused on the overall narrative of the company, the brand it aspires to retain, and the long-term prospects of success. When shareholders believe in the company, the company succeeds. At the point management blatantly chooses self-preservation over investor interests, the tip of the sword penetrates the corporate guise.

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