bid strategy & tactics

8/9/2019 BID STRATEGY & TACTICS

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Subject- CRFE- UNIT- 4Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

UNIT- IV - BID STRATEGY & TACTICS

Defenses against takeover, evalating !erger "erfor!an#e, "ost !erger a#tivit$,

reglations of % & A, Roles of instittional la$er in %&A

Bi'is an offer to pay a specified price for an article about to be sold at auction.The bidder has a r

ight to withdraw his bid at any time before it is accepted, which acceptance is.generally manifest

ed by knocking down the hammer. A price offer is called a bid.

Bi''ing is an offer (often competitive) of setting a price one is willing to pay for something

The term may be used in context of auctions, stock exchange, card games, or real estate. Bidding

is used by various economic niches for determining the demand and hence the value of the article

or property,

E(a!"le ! "n today#s world of advance technology, "nternet is one of the most favourite

platforms for providing bidding facilities$ it is the most natural way of determining the price of a

commodity in a free market economy.

The Tactics that may be used in developing a bidding strategy should be viewed as a series of

decision points, with ob%ectives and options usually well defined and understood before a

takeover attempt is initiated.

&rebid planning should involve a review of the target's current defenses, an assessment of the

defenses that could be put in place by the target after an offer is made, and the sie of the floatassociated with the target's stock.

&oor planning can result in poor bidding, which can be costly to *+s. tudies show that almost

onehalf of ac-uiring firms *+s are replaced were replaced within five years of a ma%or

ac-uisition. oreover, top executives are more likely to be replaced at firms that had made poor

ac-uisitions sometime during the prior five years.

Co!!on )i''ing strateg$ob%ectives include winning control of the target, minimiing the

control premium, minimiing transaction costs, and facilitating postac-uisition integration. "f

minimiing the cost of the purchase and transaction costs, while maximiing cooperationbetween the two parties is considered critical, the bidder may choose the /friendly' approach.

A'vantages an' Disa'vantages of Alternative Takeover Ta#ti#s

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TA*E+VER

A takeover is virtually the same as an ac-uisition. The term ac-uisition under *B" Takeover

0egulations is defined as 1directly or indirectly, ac-uiring or agreeing to ac-uire shares or voting

rights in, or control over, a target company2

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. rien'l$ Takeover

/. 0ostile Takeover

rien'l$ Takeover-1 3riendly takeover means takeover of one company by change in its

management 4 control through negotiations between the existing promoters and prospective

investor in a friendly manner. Thus it is also called 5egotiated Takeover. This kind of takeover isresorted to further some common ob%ectives of both the parties.

0ostile Takeover-1A takeover would be considered 6hostile6 if

7 The board re%ects the offer, but the bidder continues to pursue it, or

7 "f the bidder makes the offer without informing the board beforehand

Types of 8ostile Takeover

Ten'er offer1The ac-uirer makes a public offer at a fixed price above the current market price.

Cree"ing Ten'er offer1lowly buying enough shares from the open market to effect a change

in management.

ro($ ig2t1The Ac-uirer tries to persuade enough shareholders, usually a simple ma%ority, to

replace the management with a new one which will approve the takeover.

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9. To gain opportunities of market growth more -uickly than through internal means.

:. To seek to gain benefits from economies of scale.

;. To seek to gain a more dominant position in a national or global market.. To diversify its product or service range to protect itself against downturns in its core

markets.

DEENSES AGAINST 0+STI3E TA*E+VERS

There are several ways to defend against a hostile takeover. The most effective methods are

builtin defensive measures that make a company difficult to take over.

re-+ffer Takeover Defense %e#2anis!s

&oison pills (flipin pill and flipover pill)

&oison puts

"ncorporation in a state with restrictive takeover laws

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taggered board of directors

0estricted voting rights

uperma%ority voting provisions

3air price amendments

?olden parachutes

ost-+ffer Takeover Defense %e#2anis!s

1@ust say no2 defense

itigation

?reenmail

hare repurchase

everaged recapitaliation

1rown %ewels2 defenses

1&acan2 defense

hite knight defense

hite s-uire defense

Bank mail pills

hite mail

ollipop defence

RE-+ER TA*E+VER DEENSE %EC0ANIS%S

A company may set up preemptive defense mechanisms in order to help ensure that it remains

independent or to increase its purchase price.

Rig2ts Base' Defenses! These are shareholder actions that can be taken to make the company

less attractive to a wouldbe ac-uirer.

oison ills! Trigger the issuance of target company stock at a discounted price to dilute

earnings.

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li"-in ill! Target company shareholders can buy stock at a discount, once one share

owner crosses a specific ownership threshold.

li"-over ill! Target company shareholders can buy the ac-uirer's stock at a discount

from the market price.

+IS+N I33-: "t is a strategy where the target company issues lowpriced preference

shares to its shareholders. This increases the total issued share capital of the target

company and conse-uently makes it more costly for the ac-uirer to ac-uire the target

company. Although this strategy may cause loss to the target company but this strategy is

sometimes very effective in avoiding the hostile takeover as in

*xample !Saurashtra Cement Case where the company allotted shares to its promoter

and other foreign companies and expands its capital base thereby made it more costly for

the Ac-uirer as well as made the offer invalid as it was not made on the expanded capital.

SUICIDE I33

This is the extreme version of poison pill where the tactics adopted

by the target company to avoid hostile takeover results in selfdestruction. But this defense is not practical and thus not normally

resorted to.

9 S2ark Re"ellants! an change the target's corporate charter with no action from

shareholders, in order to fend off a hostile ac-uirer.

Strategi# In#or"oration 3o#ation! "n some %urisdictions it may be easier to resist hostile

takeovers, so companies may select one of these locales for incorporation.

Staggering Boar' Ter!s! hile considered less than optimal from a corporate governance

standpoint, staggered board elections can increase the amount of time takes a wouldbe

ac-uirer to get board representation.

Gol'en ara#2tes! The term 6golden parachute6 is a wonderfully descriptive term for a

defensive measure used by a company to prevent hostile takeovers. ith golden parachutes,

employers enter into agreements with key executives and agree to pay amounts in excess of their

usual compensation in the event that control of the employer changes or there is a change in the

ownership of a substantial portion of the employer#s assets. Top executives are provided with a

financial soft landing in the event that a takeover results in discharge. The company initiating the

hostile takeover, on the other hand, will either have to pay this associated increased costs when

ac-uiring the corporation or back down from the takeover

?olden parachute payments do not have to be made under a legally enforceable agreement orcontract. A formal or informal understanding will suffice.

3or E(a!"le,an oral agreement is enough even though such an agreement would not be legally

enforceable under state contract law principles. 5ot having a written agreement,

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The golden parachute defense is widely used by American companies. The presence of 1golden

parachute2 plans at 3ortune 9CCC companies increased from ;=D in 9EFG to F9D in :CC9,

according to a survey by *xecutive ompensation Advisory ervices.

Nota)le e(a!"lesinclude ex attel *+ @ill Barad's HI =C million departure payment, and

itigroup "nc. @ohn 0eed's HI ;C million in severances and HI = million per year for life.

air ri#e A!en'!ents! ets a price floor for the would be ac-uired firm's shares.

S"er!a4orit$ rovisions! 0e-uires a shareholder vote approving the merger well above a

=9D simple ma%ority in order for the takeover to be allowed.

Voting Rig2ts Restri#tions! 0e-uires a large shareholder to obtain board permission to vote

once a certain ownership threshold has been crossed.

+ST-+ER TA*E+VER DEENSE %EC0ANIS%S

56UST SAY N+71

anagement can decline an ac-uirer's offer and attempt to convince the board that a takeover is

not best for the firm.A strategy used by corporations to discourage hostile takeovers in which

board members re%ect a takeover bid outright. The legality of a %ust say no defense may depend

on whether the target company has a longterm strategy that it is pursuing, which can include a

merger with a firm other than the one making the takeover bid, or if the takeover bid simply

undervalues the company.

3ITIGATI+N! ost effective as a delay tactic, a target can use the court system to contend

that a takeover would materially harm the competitive structure of the industry.

3EVERAGED S0ARE REURC0ASE! A target may borrow in order to buy shares on

the market$ this can drive up the price for the ac-uirer and also increase the risk of the

target's balance sheet. "n its extreme form, target company management may use debt to buy

all of the shares and take the target company private$ this would be a leveraged buyout.

3EVERAGED RECAITA3I8ATI+N! imilar to the leveraged share repurchase, but will

leave some e-uity to trade in the public stock exchange. A corporate strategy in which a

company takes on significant additional debt with the intention of paying a large cash

dividend to shareholders andJor repurchasing its own stock shares. A leveraged

recapitaliation strategy typically involves the sale of e-uity and the borrowing or

refinancing of debt.

The result is asset andJor liability restructuring, where the company#s liabilities are increased

and where e-uity is reduced. This strategy is an intentional antitakeover measure used to

make the corporation less attractive to potential ac-uirers. "n mergers and ac-uisitions,

strategies, these are often called 6shark repellents,6 since they are intended to fend off

unwanted or hostile takeover attempts. Also called leveraged recap.

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90ITE *NIG0T

The target company or its existing promoters enlist the services of another company or group

of investors to act as a white knight who actually takes over the target company, thereby

foiling the bid of the raider and retaining the control of existing promoters.

/::; - everstal almost acted as a white knight to Arcelor as the merger negotiations were in

place between Arcelor and ittal teel

/::; - Bayer acted as a white knight to chering as the merger negotiations were in place

between chering and erck K?aA

E(a!"le ! "n :C9C, 0eliance "ndustries played white knight to the promoters of *"8 by

buying 9


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for the hostile ac-uirer. rown %ewel defense is a useful tactic to avoid hostile takeover

especially for those companies where its assets backing is ma%or strength.

This defense is not practical in "ndia because of 0eg. :>(:)(a) of Takeover

0egulations, which restricts the B+Is of Target ompany 4 any of its subsidiary

from alienating any material assets outside the ordinary course of businesswithout the approval of shareholders of the ompany by pecial resolution.

AC-%AN DEENSE

&acman defense is a strategy where the target company starts buying the shares of its

ac-uirer company with the ultimate ob%ective of taking over its ac-uirer. "t is when a

company that is under a hostile takeover attempts to ac-uire its wouldbe buyer. The most

-uoted example in H.. corporate history is the attempted hostile takeover of artin arietta

by Bendix orporation in 9EF:. "n response, artin arietta started buying Bendix stock

with the aim of assuming control over the company. The incident was labeled a


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investment bankers (primary), accountants, attorneys, tax specialists, etc. They aid by

utiliing various antitakeover strategies, thereby making the Target ompany economically

unattractive and ac-uisition more costly. A killer bee uses defensive strategies to keep an

attempted hostile takeover from occurring.

90ITE S=UIRE

A white s-uire is similar to a white knight, except that it only exercises a significant minority

stake, as opposed to a ma%ority stake. The white s-uire may be an outside group or company,

a subsidiary of the target or the target#s employee pension fund. ?enerally, a large amount of

stock is issued to the white s-uire with the aim of ensuring that control of the target stays in

friendly hands.

A hite -uire is a firm that consents to purchase a large block of the target company's stock

The hite -uire is typically not interested in ac-uiring management control of the target but either

as an investment or representation in board of the target company Advantage to Target ompany

arge amount of tock will be placed in hands of an investor which may not be tendered to hostile

bidder

E.g..Te#2ni#all$ Relian#e is 92ite S>ireto +)eroi 0otels against EI0.

V+TING RIG0TS 3AN1

Loting &lans this poison pill strategy is designed to dilute the controlling power of the

ac-uirer. Hnder this plan, the target company issues a dividend of securities, conferring

special voting privileges to its stockholders. 3or example, the target company might issue

shares that do not have special voting privileges at the outset. hen a potential hostile bid

occurs, the stockholders, other than the ac-uiring party, receive super voting privileges.Alternately, the target company#s stockholders might receive securities with voting rights that

increase in value over period. Loting plans were first developed in 9EF=. They are designed

to prevent any outside entity from obtaining power of the company . Hnder this plan the

company issues a dividend of preferred stock. "f any outside entity ac-uires a substantial

percentage of the company's stock, holders of preferred stock become entitled to super voting

rights.

BAN* %AI3 I33S

Bank mail defense wherein the bank of a target firm refuses financing options to firms with

takeover bids thereby having the triple impact of imposing financial restrictions upon theac-uirer, increasing transaction costs in locating another financing option and also buying

time for the target company to put more defenses in place. This takeover tool serves multiple

purposes, which include

9. Thwarting merger ac-uisition through financial restrictions,:. "ncreasing the transaction costs of the competitor's firm to find other financial options,

and

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?. To permit more time for the target firm to develop other strategies or resources.

90ITE %AI3

"t is an antitakeover arrangement in which the target company will sell significantly

discounted stock to a friendly third party. "n return, the target company helps thwart takeover

attempts, by raising the ac-uisition price of the raider, diluting the hostile bidder's number of

shares, and increasing the aggregate stock holdings of the company.

3+33I+ DEENCE

This is a strategy where in target creates barriers outside its periphery to protect the company

from takeover. "t is called lollipop defence as the company is compared to a lollipop, which

has a hard, crunchy exterior but a soft, chewy centre. i.e. . The takeover is made difficult due

to the initial barriers, but the company in general is an attractive takeover target (soft, chewy

enter). The target company presumes that creating a lollipop Mtype defence provide

ade-uate security from the takeover attempts .

RIEND3Y TA*E+VERS

3riendly takeovers can involve either the ac-uisition of the assets of the company or the

purchase of the sto#k of the target. There are several a'vantagesasso#iate'with the "r#2ase

of assets.

irst, the ac-uiring firm can purchase only those assets that it desires.

Se#on', the buyer avoids the assumption of any contingent lia)ilities of the target.

T2ir', the purchase of assets is easier to negotiate since only the board of directors, and not

the shareholders, need approve the ac-uisition.

The se#on' t$"eof friendly takeover involves the "r#2ase of t2e sto#k ofthe target. "n this

instance, the ac-uiring firm does assume the liabilities of the target firm. The target firm

continues to operate as an autonomouss)si'iar$ or it may be merged into the operations of the

ac-uiring firm. The approval of the target#s shareholders is necessary for this type of ac-uisition.

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%ERITS AND DE%ERITS + @0+STI3E TA*E+VER@

An analysis and study of the various cases of corporate takeovers exposes the following !erits

an' 'e!erits of @2ostile takeover@ (for the sake of brevity, the company contemplating a hostiletakeover is referred to as #Ac-uirer ompany# and the company proposed to be taken over is

referred to as #Target ompany#).

A'vantages to t2e a#>irer #o!"an$1

9. The ac-uirer is benefited by way of reduction in procurement costs and operational synergies

resulting in improved margins.

:. The ac-uirer is able to ac-uire new technology and add to its manufacturing capacities.

;. The ac-uirer is able to increase its market share and ac-uire new brands.


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A'vantages to t2e s2are2ol'ers of t2e target #o!"an$1

9. Takeovers can throw out managements which have mismanaged the affairs of the companies

or not rewarded their shareholders appropriately.:. Takeovers result in substantial returns to the shareholders since the share prices shoot up on

the bourses and also the offer price is much above the -uoted price.

;. A sincere and committed ac-uirer would endeavour to set the target company on the proper

tracks and the resultant improvement in performance would benefit the company as a whole.

Disa'vantages to t2e s2are-2ol'ers of t2e target #o!"an$ 1

9. A malicious predator can play a destructive role by damaging the business prospects, the

market share and the future potentials of the target company.

:. "n the event of the takeover bid getting stalled due to litigation or other factors, the shareprice tumbles on bourses resulting in losses to the shareholders.

;. "n the event of a failure of the takeover bid, the share prices may tumble even below the pre

offer level.


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;. &lenty of takeover opportunities are available now due to factors like ! ompanies

undervalued but having strong prospects$ companies which are cashrich but are not using

their resources properly$ family run businesses which have witnessed a fall out between

family members.

R+3E + BAN*S AND INANCIA3 INSTITUTI+NS T+9ARDS 0+STI3E

TA*E+VERS!

The role of all public sector banks and financial institutions towards financing of hostile

takeovers has been absolutely passive. The logic and reasoning behind this is that can public or

government funds which have been originally contributed for developmental purposes, be used

for corporate ware and funding hostile takeovers N onsider a case where a bank or a financial

institution decides to finance the hostile takeover of a small company by a big business house. A

writ petition by the target company challenging misuse of government funds for restricting the

fundamental right of carrying on a business under Article 9E(9)(g) of the onstitution, would be

the immediate fallout. o long as banks and institutions remain under government control,

funding of hostile takeovers so as to detrimentally affect the fundamental rights of the target

company is ruled out. The moot -uestion here would be why should a government owned bank

or institution support the business of one company (ac-uirer) to the detriment of the business of

the target company. uch an action would be highly vulnerable to legal challenge on the ground

of violation of fundamental rights. "t must be distinctly pointed out here that any indirect

financing of hostile takeovers via the route of subscribing to debenturesJbondsJpreference shares

by the banks or institutions, would also be vulnerable to %udicial challenge. 3urther, the -uestion

as to whether funding of hostile takeovers was ever recognied as an ob%ective when such banks

or institutions were set up, also arises.

Another crucial role of financial institutions and banks arises in the context of their share

holdings in the private sector companies$ it is estimated that they control ;= to GCD of the private

e-uity. "t is doubtless true that institutions and banks holding such percentage of shareholding

can tilt the scales in the event of any hostile takeover bid. 8owever, experience has proved that

they play a passive role and maintain status -uo when confronted with such situations. There

definitely exists a #gateway# (in the context of shareholding control) for banks and institutions

when confronted with a takeover bid whether to retain or dispose of the shareholding of the

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target company should be a pure commercial decision. "nstitutions and banks have every right to

buy or sell shares, and hence such an action cannot be challenged on the ground of misuse of the

instrumentality of the tate. This is supported by the upreme ourt decision in *lectronic

orporation of "ndia td. v. ?ovt. of Andhra &radesh, (9EEE) EG omp. ases


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be opposed to hostile takeovers. 3urther, it is a next to impossible proposition that the Board of

the target company will pass a resolution according approval for registering shares to make

successful a hostile takeover bid.

0eference ! https!JJwww.bcasonline.orgJarticlesJartin.aspN9>G

REGU3ATI+NS + % & A

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bid strategy & tactics

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