Anti-Takeover Measure

What Is an Anti-Takeover Measure?

An anti-takeover measure is any action that is taken on a continual or sporadic basis by a firm's management to prevent or deter unwanted takeovers by another firm or group of investors. The attempts of an acquiring company are usually known as a hostile takeover, as it is unwanted by the target company, and so the target company must employ defensive measures to prevent the takeover from happening.

Understanding an Anti-Takeover Measure

Companies are often interested in acquiring other companies. There are many reasons that a company would wish to do so.

These reasons can include management believing that the combination of both companies would result in synergies that would make both companies stronger than if they were standalone. Management might also want to acquire another company to gain access to another area of a market or increase their current market share. They may also believe that the company is being run poorly and that they can run it better, making it more profitable. Sometimes a company just prefers to rid themselves of competition.

Acquiring companies usually seek to purchase large amounts of the target company's shares until they hold a majority of shares and therefore control.

Companies that are targets of an acquisition may agree to an acquisition, believing it to be beneficial, or, they may not want to go down that path. The management of a target company may want to maintain the independence of the company, particularly in industries where consolidation is escalating. Further, the management may not believe potential acquirers will properly value the company in a hostile takeover. In all of these cases, they would have to prevent the acquisition from occurring.

Anti-takeover measures can be a continuous part of a company's business plan or can be implemented when a company believes that it has become a target. Making a stock less appealing, more expensive, and implementing a retaliatory response are just some of the anti-takeover measures a company can employ.

Common Anti-Takeover Measures

Companies have many different options for preventing takeovers. Continuous provisions include placing stipulations in the corporate covenant and in issues of participating preferred stock. The sporadic measures include the so-called Pac-Man Defense, which calls for a retaliatory takeover bid aimed at the company attempting to make the acquisition, and the so-called Macaroni Defense, which involves the issuing of numerous bonds that must be bought at an exorbitant premium in the event of an acquisition of the company. There are many other common anti-takeover measures.

Poison Pill

One of the most popular anti-takeover measures is the poison pill, also known as shareholder's rights. The poison pill allows shareholders, except for the acquiring company, to purchase additional shares below the market price. This dilutes the value of shares already held by the acquiring company, making the acquisition more expensive.

The rights to purchase additional shares are usually stipulated in company documents when shares are issued, deterring any company from pursuing a takeover from the start. If a takeover is pursued, a poison pill can be triggered when an acquirer owns a certain percentage of shares outstanding.

A poison pill could also be structured to let shareholders in the company purchase shares at a discount in the acquiring company to dilute the shares of those shareholders, thus making the takeover attempt less attractive.

Fair Price Amendment

Other means that may be put in place to deter takeover attempts can include the introduction of a fair price amendment into the bylaws of the company. This would require any buyer to pay what the bylaws determine to be a fair price. This may be derived from the historic prices of the company’s shares and include a required payout to all shareholders at that price. Such an amendment is yet another way to make a hostile takeover too expensive for the buyer.

Procedural Approach

There are also procedural approaches to putting anti-takeover measures in place. This can include setting up staggered elections for seats among the board of directors. This tactic tends to make it more difficult for a bidder to get directors of their choice elected to the board to advocate for the takeover. Likewise, the company could choose to increase the number of shareholder votes required to affirm any deal, further complicating any takeover efforts.

By introducing such obstacles, anti-takeover measures can give the existing leadership of a company a way to defend their control from hostile bids.