What is Killer Bees Defense Strategy?
Killer bees are the individuals or companies that help other companies in preventing the risk of takeovers like attorneys, investment bankers, tax specialists, accountants, etc. through the implementation of anti-takeover strategies such as making the acquiring company feel that the target company is less attractive and very difficult to acquire.
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
- Poison PillsPoison PillsPoison 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.
- 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.
- 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.
- People pills
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 a combination of the 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 that significantly raise the cost of acquisitions creating disincentives to deter such attempts. The targeted firms utilize all possible methods to increase their business share, which can include mergers, 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 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. 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 the Poison PillFlip Over The 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. allows stockholders of the target company to purchase 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 companyHostile Takeover Of The CompanyA hostile takeover is a type of acquisition of a target company by an acquiring company in which the target company's management is not in favour of the acquisition but the bidder still uses other channels to acquire the company, such as acquiring the company through tender offer by directly making an offer to the public to buy the shares of the target company at a pre-specified price that is higher than the prevailing market prices. 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 to acquire the company, which made an attempt for the hostile takeover. The idea is to create 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 (a leading supplier of aggregates and heavy building materials) by purchasing a controlling amount of stocks. On paper, Bendix became the owner of the company. In retaliation, Martin Marietta’s management sold off 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 as an individual or company which acquires a target company that 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 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., JP Morgan Chase acquired Bear Sterns (Investment Bank & Brokerage house). If JP Morgan had not 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 sharesBuy Back The Issued SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company. 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 have prevented hostility from taken place, which otherwise may have proven to have disastrous consequences.
This article has been a guide to what is Killer Bees Defense Strategy. Here we discuss how it works along with the top 5 anti-takeover Killer Bee strategy, including the poison pill, white knight, people pill, whitemail, and pacman defense. You may learn more about Mergers and Acquisitions from the following articles –