Post-offer Defense Mechanisms
There are two kinds of defensive measures to resist a hostile takeover:
- pre-offer defense mechanisms, which we discuss in more detail here
- post-offer defense mechanisms, which are taken after the hostile offer takes place
Most merger and acquisition (M&A) legal experts recommend that defenses are set up before an offer occurs, because these kinds of defenses tend to face less scrutiny in court. On this page, we discuss common types of post-offer defense mechanisms.
Just say no defense
The first step in avoiding a hostile takeover offer is to simply say no. If the potential acquirer goes directly to shareholders with a tender offer or a proxy fight, the target can make a public case to the shareholders concerning why the acquirer’s offer is not in the shareholders’ best interests.
The basic idea is to file a lawsuit against the acquirer that will require expensive and time-consuming legal efforts to fight. The typical process is to attack the merger on antitrust grounds or for some violation of securities law. The courts may disallow the merger or provide a temporary injunction delaying the merger, giving the managers more time to load up their defense or to seek a friendly offer from a white knight.
Greenmail is a payoff to the potential acquirer to terminate the hostile takeover attempt. Greenmail is an agreement that allows the target to repurchase its shares from the acquiring company at a premium to the market price. The agreement is usually accompanied by a second agreement that the acquirer will not make another takeover attempt for a defined period of time.
The target company can submit a tender offer for its own shares. This forces the acquirer to raise its bid in order to stay competitive with the target’s offer and also increases the use of leverage in the target’s capital structure, which can make the target a less attractive takeover candidate.
In a leveraged recapitalisation, the target assumes a large amount of debt that is used to finance share repurchases. Like the share repurchase, the effect is to create a significant change in capital structure that makes the target less attractive while delivering value to shareholders.
Crown jewel defense
After a hostile takeover offer, a target may decide to sell a subsidiary or major asset to a neutral third party. If the hostile acquirer views this asset as essential to the deal (i.e. a crown jewel), then it may abandon the takeover attempt. The risk here is that courts may declare the strategy illegal, if a significant asset sale is made after the hostile bid is announced.
In the video game Pac-Man, electronic ghosts would try to eat the main character, but after eating a power pill, Pac-Man would turn around and try to eat the ghosts. The analogy applies here. After a hostile takeover offer, the target can defend itself by making a counteroffer to acquire the acquirer. In practice, the Pac-Man defense is rarely used because it means a smaller company would have to acquire a larger company, and the target may also lose the use of other defense tactics as a result of its counteroffer.
White knight defense
A white knight is a friendly third party that comes to the rescue of the target company. The target will usually seek out a third party with a good strategy fit with the target that can justify a higher price than the hostile acquirer. In many cases, the white knight defense can start a bidding war between the hostile acquirer and the third party, resulting in the target receiving a very good price. The tendency for the winner to overpay is called the winner’s curse.
White squire defense
In medieval times, a squire was a junior knight. In today’s M&A world, the squire analogy means that the target seeks a friendly third party that buys a minority stake in the target without buying the entire company. THe idea is for the minority stake to be gig enough to block the hostile acquirer from gaining enough shares to complete the merger.
We discussed the most common types of post-offer defense mechanisms. More details on pre-offer defense mechanisms can be found here.