Busi 536 Discussion Board Week 3
Discussion Board Week 3
School of Business, Liberty University
Busi 536 Merger and Acquisition
Dr. Jeff Woo
April 9, 2021
Question? Describe and discuss two antitakeover defenses. What impact do these defenses have
on shareholder wealth?
A hostile takeover is when a company is being taken over and management does not
agree to the purchase of the company or “an attempt to buy a company when the people who
own the company do not want to sell it”. (Merriam Webster). The question is asked how does
Busi 536 Discussion Board Week 3
one stopped the purchase? Two defenses against a hostile takeover that is used effectively are
the Poison Pill and Corporate Charter Amendments. (Gaughan, p187-197).
The Poison Pill was created by M & A attorney Martin Lipton, which made the purchase
of the company shares awfully expensive and prohibitive to the acquirer which becomes a
deterrent to the corporate raider in pursuing the target company. Management has used this
defense to slow down the intention of the purchaser to either negotiate a better deal or to find
another buyer who is friendly to the management. Some shareholders have viewed the poison
pill as a tactic that takes away value from them because they do not have the right to vote on the
bid and the purchase could be more valuable as new management and bring their investment to a
better position. (CBSNEWS.com). It could be the management is doing a terrible job and that is
why the company is being targeted for acquisition and the shareholder agrees that the
management should be ousted, with a new management team. The Poison Pill prevents the say
of the shareholder and this could be a reason not to have this in the corporate bylaws. However,
most of the company are not using Poison Pills unless a threat has materialized as a last resort to
negotiate a better deal for management. The belief is the strategy is in the best interest of the
management team but not the shareholders’ value which has changed the demands of
shareholders to have a say when it comes to exercising the Poison Pill strategy. Shareholders see
this a decrease in value to their investment and may seek not to invest in company with Poison
Pill and that makes the value of the company on the open market less valuable. (Gaughan, p.
197).
Another defense is to change the Corporate Charter to make it more difficult for an
acquiring company to implement their takeover strategy which requires shareholders approval.
For example, the corporate charter could be to change the state of incorporation where that states
Busi 536 Discussion Board Week 3
have strict corporate takeover laws or strict labor laws on dismantling the corporation. These
changes to the charter are not in the benefit of the hostile takeover company and maybe the
detriment to the takeover strategy such as selling assets or shedding divisions that does not make
a profit. The staggering of the board terms is a change in the charter where the board is elected
1/3 every year which makes it difficult for the acquirer to gain sufficient support of the board to
sell assets or to change management. (Gaughan, p. 207). Again, some shareholders disagreed
with the staggering board because this would lessen the value of their shares by not having a
board that could be independent on making decisions for the benefit of the shareholder. Most
shareholders are reluctant to vote on a staggering board change to charter. (Gaughan, p. 208).
The two defenses are tactics used to stop a hostile takeover or make a company undesirable to be
purchased but in the current environment with shareholder advocates for rights, these strategy are
not used to stop an acquirer but to slow them down to negotiate a better price for the shareholder.
Bible Quote
“I pursued my enemies and overtook them, and I did not turn back until they were consumed.”
(Psalm 18:37). This maybe the strategy of the existing management to prevent a new owner to
takeover and to stop them, they will use the Poison Pill strategy to slow down their enemies.
References:
Merriam Webster, https://www.merriam-webster.com/hostiletakeover
Gaughan, P. A. (2018). Mergers, Acquitisitions, and Corporate Restructurings. Hoboken: John
Wiley and Sons, Inc.
CBSNews.com https://www.cbsnews.com/news/what-is-a-poison-pill/
Psalm 18:37, The Holy Bible, English Standard Version
Busi 536 Discussion Board Week 3
Reply Discussion
One
Hi Barbara,
I loved your quote from the bible, and I thought it was fitting for the strategy of secretly
infiltrating a company on the pretense of being an investor but the strategy to takeover the
company is the real intention. The concept toehold is like investors who are champing to be a
shareholder’s advocate and to shake things up in a sleepy company. The investor does not have
that much to lose if the target company is indeed mismanaged and the mere appearance there is a
target for change could drive up the stock price. But this can backfire on funds that target
companies that the management can fight back, or the market perceive the company to be in
good hands. A good example is Herbal Life, where Ackerman bet that the company was going
down and shorted the stock whereas Carl Ichan believed in the company and made a fortune by
staying with the company. Ackerman lost a billion dollar and Ichan made a billion dollars. The
stock surged and the company stock went up instead of down. (cnnbusiness.com). These private
equity funds are professionals that buys and sell companies based on merger tactics that can be
very risky to investors. Your description of the information asymmetry is intriguing because the
acquiring company is betting that the information is in real time and it is the most accurate
information, these can be the detriment to a company that is hostile because the information may
not be fully disclosed to the bidder in real time but trickled down by way of litigation or by use
of non-disclosure agreements through a letter of intent by a friendly takeover company.
(Gaughan, 2018). If a company doesn’t want to be acquired, there are many ways to stop them
from being acquired but I believe at the cost of the shareholder if management has not done a
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good job of increasing shareholders value. There is a reason why these companies are targeted
by a hostile bid and maybe one of them is incompetent management?
CNN Business, https://money.cnn.com/2018/03/01/investing/herbalife-bill-ackman-carl-
icahn/index.html
Gaughan, P. A. (2018). Mergers, Acquitisitions, and Corporate Restructurings. Hoboken: John
Wiley and Sons, Inc.
Reply Two
Hi Sarah,
Your discussion of a tender offer vs. open market was insightful. Reading the textbook about
tender offer is the fast way to purchase a company for control, it easier to talk to a few major
shareholders than buy stocks from a thousand shareholder at different prices. (Gaughan, 2018).
The risk is not buying enough stock on the open market to gain control. As a shareholder, I
would want the highest and best price which might not be the tender offer but if the company is a
target there is a big risk that if the acquisition does not happen, my shares will go down in value.
The open market might dictate the price of the stock at its current stage but is that a true value?
The tender offer maybe a fair value which is the question what the difference between price and
value described by Benjamin Graham is, the father of value investing. (Graham, (2009)6th
edition). If the tender offer is the best value then the management has a fiduciary duty to the
shareholders to explain that this is the best value at the current time for the company and the
offer should be accepted. The most famous student of Graham, Warren Buffet is known to make
his investment based on the best value or hidden value of a company. Maybe the open market
Busi 536 Discussion Board Week 3
stock price is the right value or less, and the tender offer reflects that price. I liked your bible
verse and it was fitting for the topic.
Reference
Graham, B, Lodd, D, (2009). Security Analysis 6th Edition forward by Warren Buffet.
Gaughan, P. A. (2018). Mergers, Acquitisitions, and Corporate Restructurings. Hoboken: John
Wiley and Sons, Inc.
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