Shark Watcher

What Is a Shark Watcher?

The term shark watcher refers to a professional or firm that specializes in the early detection of hostile takeovers. Shark watchers are hired by firms that are concerned about the possibility of being targeted by larger corporations. They monitor aspects of a firm's trading activity on the market that could indicate a possible takeover, such as who is accumulating shares and the number of shares acquired.

How Shark Watchers Work

Large corporations often look at smaller companies and startups as easy takeover targets. The target firm may have a product or service worth acquiring, the acquirer may want to tap into a new market, its business operations may align with the acquirer, or the target may be competing with the larger company.

When a company doesn't want to be taken over, the potential acquirer may decide to pursue a hostile takeover. This occurs when the company behind the takeover tries to buy enough shares of the target on the open market or by purchasing shares from existing shareholders. Acquirers may also try to take control of the company and replace its management team to approve the takeover.

Companies may have experience problems with their share prices as a result of issues with management, finances, or its business. Potential targets have to be vigilant to prevent themselves from being taken over. One way to do so is by hiring what the financial industry calls a shark watcher. The term is analogous to a large shark swimming around a body of water in search of smaller fish to swallow up.

A shark watcher is a professional or company that monitors trading patterns in their client's stock and attempts to determine who is accumulating shares. That's because companies often initiate hostile takeover attempts by acquiring stock so that they can control a significant part of voting rights or a majority of voting rights. The shark watcher's primary business is usually the solicitation of proxies for client corporations.

A shark watcher can also be hired by a third party who is interested in possible risk arbitrage opportunities that may arise as a result of an attempted takeover.

Special Considerations

Shark watchers are key players in mergers and acquisitions (M&A). But rather than facilitate them, shark watchers help prevent them from occurring, especially when the target company has no desire to be taken over.

So what happens when companies think they are targets? These businesses have a few options available to them when they believe another company may wish to take them over. There are a number of lines of defense that a target can use to dissuade hostile parties who may show an interest in the potential target firm. They range from poison pills to golden handshakes and golden parachutes.

The poison pill defense raises the cost associated with takeovers by making the company's shares unfavorable. A golden handshake, which is negotiated well before a takeover, provides large severance packages to a company's key personnel. Golden parachutes, on the other hand, provide executives with a number of perks and benefits in the event of a takeover before they are terminated.

In many respects, the target company makes the cost of a takeover far too high or makes the company worse off from either a financial or strategic standpoint. The goal is to lead the so-called shark to believe that acquiring it becomes a less attractive business move.

Example of a Shark Watcher

Here's a hypothetical example to show how shark watchers work. Let's say Sesame Brokerage is a publicly-traded company that has a lot of valuable assets. The company's stock price has recently been depressed due to macro trends sweeping the industry. The company's management, shareholders, and board of directors are all concerned about being a takeover target.

Sesame Brokerage hires Bert and Ernie's Shark Watchers Inc. to monitor the trading activity of Sesame Brokerage's shares on the open market. The firm will track companies that acquire shares of Sesame Brokerage and alert Sesame's management team to any possible takeover threats if and when an acquisition is made or before.

At this point, Sesame Brokerage could be made aware by its shark watcher that Monster ABC has been buying up significant amounts of its shares, possibly seeking to acquire a majority holding. Monster ABC is known for acquiring depressed companies. Sesame Brokerage can then prepare itself to fight off the takeover by implementing a variety of defenses before the acquisition is attempted.