Investment Banking Tutorials
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Acquisitions Examples
- Horizontal Merger
- Vertical Merger
- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- Joint Venture
- Advantages of Joint Venture
- Types of Joint Venture
- White Knight
- Hostile Takeover
- Golden Parachute
- Poison Pills
- Killer Bees Defense Strategy
- Show Stopper in M&A
- What is Amalgamation?
- Spin off vs Split Off
- Forward Integration
- Backward Integration
- Horizontal vs Vertical Integration
- What is Divesting / Divestiture?
- Bootstrap Effect
- PAC MAN Defense
- Flip-In Poison Pill
- Flip-Over Poison Pill
- Scorched Earth Defense Policy
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Joint Venture vs Strategic Alliance
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
- Investment Banking Basics (44+)
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- Investment Banking Firms (27+)
- Top Banks (42+)
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What is Killer Bees Defense Strategy?
Killer Bees are individuals or firms that aid other companies in preventing takeovers which includes investment bankers, attorneys, accountants and tax specialists. Killer Bees help in implementing anti-takeover strategies making the target company less attractive or more difficult to acquire. This is done by pressurizing acquirers to pay more or by diluting the holdings of the acquirer.
This termed gain prominence during the 1980s when hostile takeovers gained steam and the killer bees would act aggressively for combating the threats.
Example of Killer Bees
Let us assume Company ‘A’ is being taken over by Company ‘Z’ in the form of a hostile takeover. Since Company ‘A’ does not want to be taken over by Company ‘Z’ in this case, with the help of its finance specialists it will implement one or combination of below-mentioned strategies for making the take-over less lucrative.
Top 5 Strategies of Killer Bees
Let us analyze the top 5 strategies adopted by Killer Bees in detail:
#1 – Poison Pill
These are tactics which significantly raise the cost of acquisitions creating disincentives to deter such attempts. The targeted firms utilise all possible methods to increase their business share which can include merger, acquisitions and strategic partnerships with other firms competing in the same market. The management and/or owners of the firm desire to retain their authority over their business for a higher valuation, emotional attachment etc.
There are 2 types of poison pills:
a) Flip-in Poison Pill
Flip-in Poison Pill involves allowing the shareholders except the acquirer to purchase additional shares at a discount. This provides the shareholders with an instant profit, it further dilutes the value of a limited number of shares already purchased by the acquiring company. This right is triggered when the acquirer accumulates a certain threshold percentage of shares of the target company.
b) Flip-over Poison Pill:
Flip over Poison Pill allows stockholders of the target company for purchasing shares of the acquiring firm at a deeply discounted price if the hostile takeover attempt is successful. For e.g. a target company shareholder may acquire the right to buy the stock of its acquirer at a 2:1 rate diluting equity in the acquiring company. The acquirer may reconsider proceeding with the acquisition if it perceives a dilution of value post-acquisition.
The flip-in poison pill is used more commonly as compared to the flip-over option.
One example was in mid-2018 whereby leading American restaurant franchise Papa John’s International Inc’s voted to implement this poison pill preventing ousted founder John Schnatter from gaining control over the firm. He owned 30% of the firm’s stock and was the largest shareholder. The Board adopted a Limited Duration Stockholders Rights Plan which granted existing investors except for Schnatter and his holding firm a dividend distribution of one right for every common share.
Since Schnatter was excluded from the dividend distribution, the strategy made a hostile takeover of the company unattractive as the potential acquirer would be made to pay twice the value per share of the firm’s common stock.
#2 – Pac-Man Defence
A smaller or equivalent firm may use this tactic to avoid a hostile takeover. In this, the target firm attempts acquiring the company which made an attempt for the hostile takeover. The idea is to create a fear in the minds of the acquirers and it can use any methods including using its reserves to buy a majority stake in the other firm.
One should note that this is an expensive strategy that may increase debts for a target company. The shareholders can suffer losses or may not receive sufficient dividends in the forthcoming years.
One of the known instances was in 1982 by Bendix Corp (American Engineering & Manufacturing Company) attempted to acquire Martin Marietta (leading supplier of aggregates and heavy building materials) by purchasing controlling amount of stocks. On paper, Bendix became the owner of the company. In retaliation, Martin Marietta’s management sold of its Cement, Chemical and aluminum divisions and borrowed over $1 billion. This resulted in Allied Corporation acquiring Bendix.
#3 – White Knights
The White Knights are referred to an individual or company which acquires a target company which otherwise is on the verge of a hostile takeover. They are considered as a savior against any hostility with the current management remaining intact and investors receiving higher compensation for their shares.
White Knights are considered white due to their Virtue and Good relations with the target firm making the acquisition a friendly affair.
An example was during the 2008 Financial crisis, JP Morgan Chase acquired Bear Sterns (Investment Bank & Brokerage house). If JP Morgan would not have acquired at the time, Bear Sterns would have to consider filing bankruptcy making JP Morgan a White Knight in the case.
#4 – Whitemail
This is an anti-takeover arrangement whereby the targeted company will sell its stock at a deeply discounted price to a friendly third party individual or corporation. This will enable to:
- Increasing the acquisition price for the prospective buyer
- Increasing the aggregate stock holdings of the firm
- Diluting the number of shares of the hostile bidder
If the strategy is successful, the company can either buy back the issued shares or keep them outstanding.
#5 – People Poison Pill
A rather defensive strategy in which the entire management will threaten to quit if a particular takeover does take place. The objective is to discourage the acquiring firm with the hope that it may have to put together a completely new management team. It will only be effective if the acquiring company desires to keep the entire or a portion of the existing management.
As discussed, killer bees are tactics implemented to prevent a hostile takeover which may prove to be detrimental to the interests of the employees and shareholders. It may also impact the culture built by the organization over the years and perhaps the overall sector may also get impacted.
Though it can be argued that killer bees may not be ethically correct, they certainly have been practiced in the past and has prevented from hostility taken place which otherwise may have proven to have disastrous consequences.
This has been a guide to what is Killer Bees Defense Strategy. Here we discuss the top 5 anti-takeover Killer Bee strategy including poison pill, white knight, people pill, whitemail and pacman defense. You may learn more about Mergers and Acquisitions from the following articles –