Different Classes of Antitakeover Measures
Takeovers are pretty common in M&As. This is why in order to protect a company, there are different classes of antitakeover measures. We will discuss all of those today.
One of the most priorities in running a business is to protect your company from a takeover. This is because a lot of shareholders and competitors are always planning a takeover. They do so to increase their stock shares – this is especially true if a company is successful.
Takeovers must be prevented. Furthermore, you can do so with the assistance of antitakeover measures.
Main Classes of Antitakeover Measures
Poison Pills
The first class of a preventative antitakeover measure is called “Poison Pills.” It is one of the most common preventative measures against hostile takeovers.
Basically, poison pills are securities placed around the company. It makes a company look less valuable in front of hostile bidders. If the bidder or competitor thinks that a company is less valuable than it actually is, they will put their focus somewhere else.
It truly is a competent form of defense. There have been countless instances where poison pills were used in order to protect a firm from a hostile takeover.
In 1982, Martin Lipton, a well-known takeover lawyer, invented the strategy of Poison Pills. Lipton used the strategy to defend El Paso Electric in its battle against General American Oil.
Then, in 1983, Lipton used the same strategy for the Brown Foreman vs. Lenox takeover contest. Know that there are different specifications of poison pills; this is very vital.
In a prior discussion, we went through this briefly. These different categories of poison pills are effective when it comes to dealing with raiders who want to achieve controlling influence over a company. Additionally, poison pills give higher return rates for companies.
Corporate Charter Amendments
The next class of antitakeover measures are known as the corporate charter amendments. Now, most people often confuse this with the corporation bylaws. However, they are not the same.
In fact, there are a lot of differences between corporate charter amendments and corporation bylaws. The board directors often establish corporate bylaws. They give the important rules for each company.
Corporate charter amendment is a more fundamental document. This document states a company’s purpose. It also contains the different classifications of shares a company may have.
Sometimes, a corporate charter amendment is called the articles of incorporations. Usually, shareholders are required to change or revise the articles of incorporation.
Looking at all of these from a merger and acquisition standpoint, the corporate charter needs to have an action such as staggering the board of directors. Now, in order to implement this, the shareholders need to approve it first.
If the corporate charter doesn’t state anything of sort before a hostile bid, then there is an increased likelihood that the shareholders may shun it.
This is crucial: keep in mind that the differences in the corporate charter are part of common anti takeover measures. State laws will dictate the extent to which these may be implemented. Now, every state has different laws, so you and your lawyers must remember this.
Antitakeover Measure Goal
As the word suggests, the goal of an antitakeover measure is to prevent a hostile takeover. Or, to make it more difficult for any hostile bidder to get managerial control over a company.
Using the methods we discussed above will make it more difficult for a hostile acquirer to change anything about a company. They will find that the task requires more time, energy, effort and money. In the end, they will think twice before making a hostile move.
A portion of the more normal antitakeover corporate contract changes are as per the following: staggered terms of the top managerial staff, supermajority arrangements, fair value arrangements, double capitalizations
Can These Measures Help?
Yes, they definitely can. You have to keep exploring and studying these common antitakeover measures in order to see how you can use it for your own company. Most giant companies utilize both strategies. This provides a layered security around the firm.
The better and higher the security, the more difficult it is for hostile bidders. Think of your company as a valuable asset, because it really is. The more individuals perceive how significant your organization is, the more they will need to dominate.
These preventative measures should be in place when that happens. It allows you to have peace of mind that your firm is in good hands no matter how hard a competitor tries.
Learning about these is crucial for every firm. It permits you to have better control of your firm, and better assurance for your entire organization.
As a leader, you need to be able to take these matters, learn from them and utilize these strategies for the better. You can also use the data you have absorbed from here to take over different firms and competitors.
It is also crucial to have a team of corporate lawyers and attorneys handling your company. They will be beneficial in your pursuit to protect your firm.
This is why there are countless companies who have lawyers in retainers. Most firms face countless threats on a yearly basis. Having a sound, smart strategy and the right people by your side can help you create the best defense and offense.
These antitakeover measures are just some illustrations of what you can do to conserve your firm. There are incalculable ways you can do so. Explore our encyclopedia for more data on what you can do as a leader.
Mergers and Acquisitions Encyclopedia
Antitakeover defenses are popular in the corporate world; especially in M&As. This is why there are a lot of antitakeover defenses and tactics discussed on our website.
You can find a lot more information about these different tactics if you go through our mergers and acquisitions encyclopedia. You can find information about mergers, acquisitions, strategies, state laws, financing, trading, buyouts, diversification, market history and more.
© Image credits to Anni Roenkae
Hubris Hypothesis of Takeovers
Roll proposed a fascinating hypothesis about takeover motives. He believed that hubris has a role in explaining takeovers. It refers to the pride of the administrators in the acquiring firm. This hypothesis states that administrators and managers want to acquire firms for their self-interest and that the pure economic advancement to the acquiring firm is not the only intent or even the dominant motive in the acquisition.
Along with other researchers, Roll used the hypothesis to understand the reason behind managers paying a lot for a firm that the market has already valued. Managers would rather lay their own valuation over one that is accurately and objectively determined by the market.
According to them the pride of the management lets them believe that their own valuation is a cut above the markets. This hypothesis implicitly shows that the efficient market can provide the best indicator of the firm’s value. But many wouldn’t believe this. Here are some pieces of evidence
Empirical Evidence of Hubris Hypothesis
Various studies over a quarter of a century show evidence of the hubris hypothesis explaining many takeovers. Early research aimed to know if the advertisements of deals caused the target’s price to increase, the acquirer’s to decrease, and a mix of the two to result in a net negative effect.
Early Research
A study by Dodd concluded that statistically significant negative returns to the acquirer after the announcement of the planned takeover. Other studies have similar results, although there are others that demonstrate the opposite. For instance, Paul Asquith failed to find a consistent pattern of declining stock prices following the announcement of a takeover.
There is more proof of positive price effects for target stockholders who experienced wealth gains after takeovers. In a study by Bradley, Desai, and Kim, tender offers led to gains for target firm stockholders.
Greater changes should be produced by the hostile nature of tender offers in the stock price than friendly takeover offers. But most studies show that target stockholders gain following both friendly and hostile takeover bids.
Bidders tend to overpay, according to a study by Varaiya. The relationship between the bid premium and the combined market values of the bidder and the target was examined. The results demonstrated that the premium paid by bidders was too immense relative to the worth of the target to the acquirer.
The hubris hypothesis is not supported by the analysis of the joint impact of the uphill movement of the target’s stock and the downhill movement of the acquirer’s stock. This was done by Malatesta and the findings showed that that the long-run sequence of events culminating in the merger has no net impact on the combined shareholder. However, it could be said that Malatesta’s failure to find positive combined returns does support the theory.
Later Research of Hubris Hypothesis
The hubris hypothesis is supported by later research in a different way. Hayward and Hambrick used a sample of 106 large acquisitions. In the sample, they found that CEO hubris positively associated with the sum of premiums paid.
The company’s recent performance, the CEO self-importance, and other variables were used to measure hubris. They also took into account the independent variables, as the CEO inexperienced according to the years in the position, along with board vigilance, as measured by the number of inside directors versus outside directors.
Takeover Theory of US Firm
Other research provides support for the theory for the takeover of U.S. firms by foreign corporations. Seth and Song used shareholder wealth effect responses similar to those proposed by Roll in a sample of 100 cross-border deals from 1981 to 1990. The researchers found that hubris, along with synergy, managerialism, and other factors play a huge role in these deals. role. Managerialism is somewhat similar to hubris, in that both may involve overpaying for a target.
Managerialism is kind of similar to hubris since both entail overpaying for a target. The former, however, considers that the bidder’s management knowingly overpays so as to pursue their own gains even if it comes at the expense of their shareholders to whom they have a fiduciary obligation. In a study by Malmendier and Tate, the role that overconfidence played in the deal was examined using a sample of 394 large companies.
They measured overconfidence by the tendency of CEOs to overinvest in the stock of their own companies and their statements in the media. Results showed that doing acquisitions was 65% more likely for the overconfident group of CEOs in their sample. They also determined that these CEOs were more likely to make lower-quality, value-destroying acquisitions.
Acquisition History
In another study by Billett and Qian further studied. This using the acquisition history of 2,487 CEOs and 3,795 deals over the years 1980–2002. CEOs with a positive experience with acquisitions were more likely to pursue acquisitions. The net purchases of their company’s own stock were higher. Before the next series of deals than they were before the first deals. This result was interpreted as the CEOs being overconfident and attributing the success of the original deal to their own managerial abilities and superior insight.
CEOs Aktas, de Bodt, and Roll presented that overconfident and hubris-filled CEOs were more likely to do deals quickly and there is less time between their deals. Where the CEOs who had done more deals in the past tended to act faster and have less time between their deals. This learning effect is complementary to other studies of the same authors.
Aktas, et al.’s’ study and other research showed that the cumulative abnormal returns of serial acquirers. Therefore, it is a decline as a function of the number of acquisitions they do. For instance, some researchers, indicate hubris since the CEOs still pursue deals. In other words, it produces much lower returns to shareholders. Others, however, opine that the declining returns could just be a function of less productive opportunities available in the marketplace. Although this is justifiable, it still seems that the CEOs. Who are hubris-filled should avoid pursuing an acquisition program. When the returns fall below some certain targeted return.
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Management Entrenchment Hypothesis versus Stockholder Interests Hypothesis
Over the past years, antitakeover measures have changed and reached new levels of hostility. And it was accompanied by different innovations as well. These measures can be divided into two, preventative and active measures. To reduce the possibility of a financially successful hostile takeover, there are preventative measures put in place.
On the other hand, there are also what’s referred to as active measures. These active measures are employed only after a hostile bid has already been attempted.
There are two different types of preventative antitakeover measures. This includes poison pills. This type of preventative antitakeover measure refers to the securities issued by a potential target. This is done so the firm would look like a less valuable venture in the eye of a hostile bidder and corporate charter amendments.
Management Entrenchment Hypothesis
The management entrenchment hypothesis proposes that non-participating stockholders have less wealth. When management takes actions to deter attempts to take control of the corporation. This concept states that corporate managers aim for the maintenance of their positions by using active and preventative corporate defenses. This theory also asserts that stockholder wealth declines due to a firm’s stock reevaluation by the market
Stockholder Interests Hypothesis
Meanwhile, the shareholder interest hypothesis is also referred to as the convergence of interest hypothesis. It states that stockholder wealth rises when management takes actions to prevent changes in control. It is considered a cost-saving when the management needs not devote resources to preventing takeover attempts. This also shows that antitakeover defenses can be utilized for making the most out of shareholder value through the bidding process. Management can assert that it will not withdraw the defenses until it gets an offer that is in the shareholder’s interests.
Effects on Wealth of Interest Hypothesis
The wealth effects on shareholders of the different antitakeover defenses. Both preventative and active, are analyzed in the lenses of the two competing hypotheses. If the installation of given antitakeover defense results in a decline in shareholder wealth, then it lends support to the management entrenchment hypothesis. But if shareholder wealth increases after the defense have been implemented, the shareholder interests hypothesis gains credence.
Support Research Interest Hypothesis
In a study by Mork, Shleifer, and Vishny, the validity of the two opposite hypotheses were examined separately from a consideration of antitakeover defenses. They took into account the entrenchment of managers as well as other important factors like management’s tenure with the company. personality, and their status as a founder.
Other factors like the presence of a large outside shareholder or an active group of outside directors were also considered. It also examined the relationship between Tobin’s q, the market value of all a company’s securities divided by the replacement costs of all assets. As a dependent variable, and the shareholdings of the board of directors in a sample of 371 of the Fortune 500 firms in 1980. Results show that Tobin’s q rises as ownership stakes rise. While a positive relationship was not uniform in that it applied to ownership percentages between 0% and 5%. Same to those above 25%, a negative relationship applied for those from 5% to 25%.
This positive correlation except for those between 5% and 25% supports the shareholder interest hypothesis. Because the higher the ownership percentage, the higher the entrenchment. This, then, whose association with higher values of securities except for the intermediate range of 5% to 25%. The researchers did not provide enough evidence of the shareholder interest hypothesis. But recent support by Straska and Waller shows how companies with low bargaining power can improve their position and shareholders’ potential gains through antitakeover.
The Right to Resist in the US vs Other Countries
Much leeway in resisting hostile bids provided by US laws to the boards of directors of US companies. Under the law, boards can resist as part of what they consider as their fiduciary responsibilities. However, there is a different situation in other countries. Other areas like Great Britain, the Eurozone, and Canada have laws that are more shareholder rights-oriented. And also boards are more limited in the defensive measures they are able to take. The laws here are more in favor of offers being made to shareholders directly and letting them decide. Meanwhile, in the United States, the laws let directors exercise their right to dictate what is best for shareholders. When boards are too close to entrenched managers, this can work against shareholders’ interests.
Takeover Defenses Life Cycle effects
The estimation of takeover protections frequently changes over the life of a firm. In the initial post-IPO years, takeover protections can solidify the bond between the company and significant partners. For instance, Johnson, Kang, and Yi report that 65% of IPO firms report at least one enormous customer.
In a study of over 2000 companies from 1997-2011 by researchers Johnson, Karpoff, and Yi. It was found that on average, firms had 2.42 defenses in place at the time of the IPO. However, this average increase at 0.67 defenses during the next 10 years that followed. The results also show that 90% of the companies in their sample never removed any of these defenses over this time. This means that such defenses are “sticky”. They also noted in their study that early in the companies’ public lives. The takeover defenses implemented were related to firm value increases. Meanwhile, the opposite was the case in a public company’s life later on. This may imply that such defenses might outlive their value as public companies age.
Preventative Anti Takeover Measures
These kinds of antitakeover measures are very typical in America. In fact, most of the fortune 500 companies have considered. And developed a plan of defense in case the company becomes a target of a hostile bid. It can be used as an action of the potential target. This means having a defensive strategy developed and a defense team selected, such as an outside law firm. Investment bankers, proxy solicitors, and a public relations firm. This group ideally meets and outlines strategies they will implement in case of an unwanted bid. This strategy should be revisited based on changes in the M&A arena as well as other changes, such as industry M&A trends.
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Do Managerial Agendas Drive M&A
Managers of firms have their personal interests, and these may be different from the other company. For managers and CEOs, this may be for the purpose of extending their stay in their position. They may also have a managerial agenda of continuing to receive what in the United States are bountiful compensations and perks. This compensation in the form of money is on top of the income they receive from being the “Big Cheese”.
In a study by Morck, Shleifer, and Vishny, 326 acquisitions over the period 1975-1987 were analyzed. The researchers found that bad deals were due to the aims of these managers doing the deals. Three types of acquisitions were found to cause lower and usually bad announcement period returns. These were diversifying M&As, acquiring a rapidly growing target, and acquiring a company when the managers have a poor performance track record before the deals. The results regarding diversification are also proof that this strategy is debatable. But their result about growing targets may reflect the fact that it is hard to “buy growth,” and when you do, you might have no choice but to overpay.
Their results with regards to bad managerial track records are also intuitive. Managerial performance may worsen if you are bad at running a business. And then you add to it and increase the managerial demands. Managers may be good at managing a specific type of focused business. Allowing them to perform in fields that they aren’t knowledgeable of may cause a tragedy. On the other hand, senior management at companies that have always been diverse since the start. Like GE is in the business of managing very diverse industries. These abilities in management are their skill set.
Vivendi and Messier’s Hubris
One relevant example in this topic is Vivendi and Messier’s Hubris. There was a case study about a stodgy French water utility before it was named Vivendi Universal. The CEO of the French water utility aimed to be a high-flying leader of an international media company. But he sacrificed shareholders’ interests to do so. The shareholders picked up the tab and he walked away with too much of their money when they failed. The combination of water and entertainment assets were so poor that they lost 23 billion euros in 2002, and 13.6 billion in 2001.
According to reports, Messier, the CEO was not satisfied with his position. He didn’t want to be the CEO of a water utility company. Instead, he engaged in major acquisitions of entertainment companies so he can become an entertainment CEO.
In the year 2000, Messier bought Seagram Universal. This resulted in him giving the major shareholders 8.9% of the Vivendi company or 88.9 million in shares.
This signaled Vivendi’s invasion in the media industry by acquiring a company which was a combo of liquor and soft drinks. Messier bought Seagram Universal as this company was formed by the acquisition engineered by young Edgar Bronfman when he took an authority position at Seagram. To finance its ventures into the entertainment industry, Edgar Bronfman used the assets and cash flow of the Seagram family business. This arrangement experienced its own rough period as the film business ended up being not as energizing to Seagram’s investors as it was to the youthful Mr. Bronfman.
Vivendi Universal Entertainment
Messier also bought Canal Plus and Barry Diller’s USA Networks which failed. This arrangement united the Universal Studios Group with the diversion resources of the USA Networks to shape what they called Vivendi Universal Entertainment. He paid 12.5 billion euros for Canal Plus despite the limitations, debts, and the company not being profitable. He even purchased a portion of Cegestal, a French telephone organization. Likewise, the organization bought Houghton Mifflin, a book distributor, for $2.2 billion, which included $500 million underwater. Vivendi also owned an equipment division that held U.S. Filter Corporation.
Messier moved to New York in 2001 and was filled with hubris. He concedes that this is a normal trait of a CEO. He said that a strong ego is more becoming, although each has his own wearing. Vivendi began to rack up the losses and shareholders and creditors called for an end of the acquisition binge and the ouster of its CEO. The company started the slow process of disassembling the media. And utility that Messier built under a new management team of Chairman Jean-Rene Fourtou and CEO Bernard Levy. The new management went back to being profitable and stable.
Winner’s Curse Hypothesis of Takeovers
Winner’s Curse was first coined by three engineers at Atlantic Richfield who discussed auctions for oil drilling rights and the bidding challenges for assets whose true value is difficult to estimate. Those who succeed in the bid can be cursed by putting forward a winning bid that exceeds the value of the assets. Thaler has shown how the winner’s curse works in different situations, even in mergers and acquisitions.
The curse of takeovers is most likely won by bidders because they are more likely to pay more and outbid contenders who are more accurate in value. This is a natural outcome of any biding competition. One of the more public forums where this usually happens is the free-agent markets of sports like baseball and basketball. In a study by Varaiya, he used 800 acquisitions from 1974 to 1983 and found that on average gains by as much as 67%. Overpayment is considered the difference between the winning bid premium. It demonstrates the existence of the winner’s curse, which then supports the hubris hypothesis.
The Bad Bidders, The Good Targets
In a study of 1, 158 companies, Mitchell and Lehn analyzed their control transactions. From 1980 to 1988 found that companies that make acquisitions show that takeovers are both a blessing and a curse. Those that reduce market value may be bad deals. Assuming the market accurately assess them, and this is the challenge. However, the deals market may take care of the problem through another takeover of a “bad bidder.” When the negative market impact of bad deals is considered. Then it is clear that good acquisitions should have a positive effect on share values. While bad deals should cause the stock price of the acquirers to decline behind the market.
It is a good thing that there is evidence where the corporate governance process may resolve the poor performance of the bad acquirer CEOs. This is proven by a study of 390 firms over the period 1990-1998 by Lehn and Zhao. The researchers found that there is an inverse relationship between the returns of acquiring firms and the possibility that the CEOs would be fired.
© Image credits to Elina Krima
Types of Preventative Antitakeover Measures
Protecting your company from a takeover is one of the most main priorities when it comes to running a business. In reality, most shareholders and other competitors are looking towards a takeover or antitakeover to hold a majority stock share in a company. This is especially true for most giant companies.
As a CEO and a company owner, it is one of your duties to prevent this from happening, amongst many other duties a CEO needs to fulfill. Thankfully, there are certain preventative measures you can take to avoid takeovers.
In this article, we will discuss the two main types of preventative anti-takeover measures, and how you can implement them. Learning about these is crucial as it equips you with the knowledge on how to protect your company better.
Think of it this way, your company is a precious castle, and there will always be people who will try to take over. In order to protect your castle, you need big, gigantic walls to prevent intruders from barging in and taking over.
In simpler terms, learning and exercising these said preventative measures is basically a wall building task. The higher and more resistant walls you build, the better. You are not just protecting your company from hostile takeovers, you are also protecting it from the raiders and their investment banking, and legal advisors.
Keep in mind that your enemies’ main goal is to devote their energies to designing different ways and strategies of scaling the defenses you have put in place. Your defenses are sometimes referred to as shark repellents, and for good reason. You need to make sure that the walls you build around your company constantly improves and gets better.
Now, onto the most common preventative measures to prevent hostile takeovers. The first preventative measure is often referred to as the “Poison Pills.”
The poison pills are basically securities issued by a potential target which makes the firm less valuable in the eyes of a hostile bidder. If it looks like the company is less valuable, it deflects the bidder’s attention elsewhere, or they might think the firm is of no value to them.
Poison pills can be an effective defense that has to be taken seriously by any hostile bidder. In fact, there are times when this type of preventative measures are so effective that the shareholder’s rights activists have pressured many companies to remove them. That is how effective this anti takeover measure is.
The strategy of Poison Pills was invented by the famous takeover lawyer Martin Lipton. Initially, Lipton used them in the year 1982 to defend the company El Paso Electric against General American Oil.
Lipton used the strategy again in 1983 during the Brown Foreman versus Lenox takeover contest. There are different types of poison pills, and they can be effective in dealing with raiders who seek to acquire a controlling influence in a target while no acquiring majority control.
The firms or companies that are protected by these Poison Pills ultimately may receive higher returns as a result of the pill defense.
Next in the list is an anti takeover measure aptly called the “Corporate Charter Amendments.”
The corporate charter amendments is not the same as corporation bylaws, there are differences between the two. For instance, the bylaws are usually established by the board of directors, and they set forth important rules for how the company will operate. On the other hand, a corporate charter is a more fundamental document that sets forth the company’s purpose and the different classes of shares it may have. This preventative measure is also often referred to as the articles of incorporation.
In these cases, a shareholder vote is usually required to change the articles of incorporation. There are many more major changes in how a company operates that may have to be set forth in the corporate charter and not by the bylaws.
From an M&A perspective, an action as big as staggering the board of directors needs to be in the corporate charter. To further implement this in the charter, it needs the shareholder’s approval. If it is not in the corporate charter prior to a hostile bid, there is a higher chance that the shareholders will not approve it.
Keep in mind that the changes in the corporate charter are common anti-takeover devices. The extent to which they may be implemented depends on state laws which can vary amongst different stays.
In this preventative measure, the target corporation can choose to enact various amendments in its corporate charter that will make it more difficult for any hostile acquirer to bring about a change in managerial control of the target. For instance, some of the amendments that can be done are supermajority provisions, staggered boards, fair price provisions, and dual capitalizations.
By using these methods, a hostile acquirer will find it very difficult to bring or make changes in the managerial control of your company. It is a bigger task that requires more time, energy, money and effort for a certain hostile acquirer which can make them think twice before a takeover.
Some of the more common antitakeover corporate charter changes are as follows:
◾ Staggered terms of the board of directors
◾ Supermajority provisions
◾ Fair price provisions
◾ Dual capitalizations
Keep exploring these common antitakeover corporate charter changes and see how you can implement them in your own company. You can choose to do only one of these, or do all of them. As long as you see it fit, and you know it will help protect your company for the better, then it must be done.
There you have it, the most common types of preventative anti-takeover measures. We hope that this article has helped you learn more about how you can protect your company better. Now, it’s time to study these methods and the legalities on how can further implement them.
These measures will help prevent any hostile takeovers and protect you and your shareholders’ assets. Remember, a strong leader needs to put up walls of defenses to keep his company safe. With these strategies in mind and in effect, you will be able to do that, too.