What Is Killer Bees Defense Strategy?
A Killer Bees Defense Strategy refers to how individuals and firms frame anti-takeover strategies to ensure they are not acquired by entities they don’t want. These killer bees act aggressively to combat the takeover threat haunting the companies targeted for acquisition. Some of the killer bees in the industry are attorneys, investment bankers, tax specialists, accountants, etc.
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The strategy is named after an insect that overpowers its victims with back-to-back stings to signify those that work on preventing unwanted takeovers. They make the target companies appear less attractive or expensive enough to afford or somehow difficult to acquire.
Table of contents
Key Takeaways
- Killer bees defense strategy is a technique adopted to prevent unwanted or hostile takeovers by making target companies appear unattractive or difficult to purchase.
- In consultation with the board members, the acquirers try to go for a friendly takeover, which, when denied, makes the whole process unfriendly.
- Killer bees, here, are individuals and firms that frame effective anti-takeover strategies to combat unwilling acquisition threats.
- Some of the most widely used killer bees methods include Pac-Man Defense, Lobster Trap, White Knights, and Poison Pill.
How does Killer Bees Defense Strategy Work?
A Killer Bees Defense Strategy is framed and developed to prevent hostile takeoversHostile TakeoversA hostile takeover is a process where a company acquires another company against the will of its management.read more. When companies are ready for a takeover, they happily go for the mergers and acquisitions (M&A) option. However, there are instances where the target firms do not want an acquisition to happen. This is where firms and individuals adopt and implement such defense strategies.
The interested acquirers first consult the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more of the target company. If they agree, friendly takeovers happen. On the other hand, if the authorities decide not to sell their firm, the acquisition process turns hostile. As a result, the management and executives in the target company choose to resist the takeover.
The killer bees in the target companies start looking out for ways to ensure the potential acquirers lose interest in their targets. They help implement anti-takeover strategies making the target company less attractive or difficult to acquire.
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Popular Mechanisms
Firms consider multiple killer bees defense strategies to ensure the hostile takeovers fail. They choose an ideal one depending on the mechanism that would work the best for a particular kind of target company. The most popular ones are as follows:
#1. Pac-Man Defense
It is a strategy whereby the target companies, in turn, place a bid to acquire their acquirer. This creates a situation where acquirers fear ending up being the takeover target themselves. However, this Pac Man DefensePac Man DefenseA Pac-man defense strategy is used by a targeted company to protect itself from hostile takeovers in which the targeted company tries to buy the shares of the acquiring company with its liquid assets, causing the acquirer company to see the risk of being taken over by the targeted company, and thus the acquirer company abandons its plan to take over the latter.read more strategy might be expensive to adopt, given the resources and funds required to turn the table and target the acquirers.
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#2. Poison Pill
A target company adopts the Poison PillPoison PillPoison pill is a psychologically based defensive strategy that protects minority shareholders from an unprecedented takeover or hostile management change by increasing the cost of acquisition to a very high level and creating disincentives if a takeover or management changes happen in order to alter the decision maker’s mind.read more defense strategy to ensure it appears to be a less attractive takeover option. In doing so, these companies raise the acquisition cost significantly so that the interested buyer steps back. The targeted firms utilize all possible methods to increase their business share, including mergersMergersMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more, acquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more, and strategic partnerships with other firms competing in the same market.
a. People Poison Pill
This is the strategy under which the entire management threatens to quit in the event of an acquisition. However, the People Poison Pill can only be effective if the acquirers are willing to retain the existing management after the takeover.
b. Flip-in Poison Pill
It allows the shareholders, except the acquirer, to buy extra shares at a discounted price. A Flip-in Poison PillFlip-in Poison PillA flip in the poison pill strategy is one in which the target company's shareholders, rather than the acquiring company's shareholders, are allowed to buy the target company's share at a discount, enabling the target company to dilute its share value.read more provides the shareholders with an instant profit, diluting the value of the acquirers’ shares.
c. Flip-over Poison Pill
It lets the target company buy shares of the interested acquirer at huge discounts in a successful unfriendly takeover. However, due to Flip-over Poison PillFlip-Over Poison PillFlip-Over Poison Pill refers to the defense strategy used by the companies in order to prevent them from the hostile takeover. The shareholders are allowed to buy the acquiring company’s shares at a discount with the main motive of combating the unwanted attempts of the takeover.read more, the acquirer may reconsider proceeding with the takeover per the value dilution post-acquisition.
#3. White Knights
The White Knights are individuals or companies that acquire a target company already set for a hostile takeover by another acquirer. They become a savior against any hostility, with the current management remaining intact and investors receiving higher compensation for their shares. The White KnightsWhite KnightsA white knight is a friendly investor who acquires the company with the help of the company's board of directors or top-level management at a fair price so that the company can be protected from a hostile takeover attempt by another potential buyer or from bankruptcy.read more help prevent unwanted takeovers due to their virtue and good relations with the target firm. This takeover makes the acquisition procedure a friendly affair.
#4. Lobster Trap
With the help of the lobster trap strategy, companies get an opportunity to have a provision in their charters to restrict shareholders with over 10% stake in the company from transferring their securities into voting sharesVoting SharesVoting Shares are the shares that authorize the shareholder to vote on Company issues like modifying its corporate policies or selecting Board of Directors etc. read more. These securities include warrants, convertible preferred stocksConvertible Preferred StocksConvertible preferred stocks are a special class of stocks which give the right to convert its preferred stock holding into fixed numbers of shares of company's common stock after the predetermined period. These are hybrid instruments with fixed dividends, providing options to acquire common stock.read more, and bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more.
Examples
Let us consider the following examples to understand how the killer bees defense strategy works:
Example 1
Company X planned to take over Company Z. Since the latter did not want this acquisition to happen, it chose to implement anti-hostile takeover strategies in response. As the company stood together, the management and executives decided to produce mass resignation in the event of an acquisition.
Company X was sure that the human resources in the company were the real assetReal AssetReal Assets are tangible assets that have an inherent value due to their physical attributes. These assets include metals, commodities, land, and factory, building, and infrastructure assets. read more. It knew that without them, the venture wouldn’t work. Hence, they dropped the idea of taking over Company Z. This is how the People Poison Pill strategy worked.
Example 2
During the 2008 financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more, JP Morgan Chase acquired Bear Stearns (Investment Bank & Brokerage house). If JP Morgan had not done so at the time, Bear Stearns might have considered filing for bankruptcyBankruptcyBankruptcy refers to the legal procedure of declaring an individual or a business as bankrupt.read more. Instead, JP Morgan became a savior and lent support to the target company as a White Knight.
Criticisms
Though entities implement killer bees methods to prevent a hostile takeover, they may prove detrimental to the interests of the employees and shareholders. In addition, it may impact the culture an organization builds over the years, and perhaps the entire sector as a whole. For example, when the company appears inexpensive and cheap, it affects shareholder valuation to a great extent, which becomes tough for them to handle.
The killer bees strategy may not be ethically correct, but they have been in practice in the past. Moreover, they have prevented hostility from taking place, which otherwise may have proven to have disastrous consequences.
Frequently Asked Questions (FAQs)
It is a mechanism adopted by target companies to remain prevented from unwanted or hostile takeovers. The strategy is named after an insect, which never lets its enemy overpower it at any cost. Similarly, when an interested acquirer plans to take over a target company, the firms, and individuals associated with the latter implement ways to avoid the takeover.
The defense strategy might not be an ethical way of dealing with hostile or unfriendly takeovers as it involves a false representation of a company’s position, performance, and progress. However, it has been used widely for a long and has produced positive results.
Yes, sandbagging, in a way, might be considered one of the killer bees strategy examples whereby the firms pretend to be less productive than they are to appear unattractive to potential acquirers.
Recommended Articles
This article is a guide to what is Killer Bees Defense Strategy and its meaning. Here we explain how different defense methods work along with examples. You may learn more about Mergers and Acquisitions from the following articles –
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