It is a type of acquisition in which the acquirer takes over controlling power of another company despite the objections of the target company. The following terms are types of defenses that target companies may deploy in order to protect themselves against a hostile takeover:
· Poison Pills – A redeemable legal right granted to a targets’ shareholders that allows them to buy more stock cheaper. It makes a takeover too expensive for a hostile party.
· Golden Parachute – The method by which executives of the target company write themselves severance packages so large that it would negatively impact the financials of the company if they were acquired and the executives were dismissed.
· Recap – The method by which the target company strives to increase its debt by taking on loans and issuing bonds, making themselves financially unappealing
· Scorched Earth – The method by which the target company sells off its most profitable assets, taking away the acquirer’s incentive.
· White Knight – The method by which the target company locates and secures a friendly company to acquire them, eliminating the threat of being taken over by a hostile party.
Mittal-Arcelor deal gave me a rare opportunity to explore how these methods can be applied to prevent the takeover. Poison pills and golden parachutes are very common. Most companies issue Preferencial stocks to its promoters. These stocks when redeemed prematurely (as in case of takeover) can prove to be very expensive. Similarly most of the options granted to the employees have a takeover clause which makes them redeemable the moment takeover happens. These phenomeons are so common that most bidders always factor them in before venturing.
Recap and Scorched Earth are sucidal tactics. Means if I cannot have it, then you also cannot have it. Only in a battle of ego will such activities be seen.
White Knight (Severstal) was however called for service, but a minority shareholder mutiny and the high price payed by Mittal overpowered him. However thanks to the emergency treaties signed with the older management, Russian Tycoon should be laughing his way to the bank.