Investment Banking Tutorials
- Investment Banking Free Course
- Investment Banking Basics
- What is Investment Banking? (Overview of what do they actually do!)
- Investment Banking Functions
- Investment Banking vs Commercial Banking
- Equity Research in an Investment Bank
- What is Asset Management Company AMC
- Sales and Trading in Investment Banking
- Private Placement, IPO and FPO in Investment Banking
- Investment Banking – Underwriters and Market Makers
- Investment Banking – Mergers and Acquisitions
- Investment Banking – Restructuring and Reorganisation
- Investment Banking Roles and Responsibilities
- Market Makers
- Propreitary Trading
- Deal Origination (Sourcing)
- Initial Public Offering (IPO)
- Top 4 Must Know Investment Banking Charts (Free Download Template included)
- Pitch Book | Guide to Investment Banking Pitch Book (Examples)
- What is LBO?
- Leverage buyout Lbo Analysis
- LBO Financing
- Trading Floor
- Market Order vs Limit Order
- Bid vs Ask
- Industry vs Sector
- Merchant Bank
- Best Investment Banking Books
- Nasdaq vs Dow Jones
- Nasdaq vs Nyse
- Differences Between NSE and BSE
- Investment Banking Careers
- Investment Banking Interview Questions (with Answers)
- How to get into Investment Banking?
- Investment Banking Analyst
- Investment Banking Job Description
- Investment Banking Division (IBD)
- Investment Banking Associate Salary
- Analyst vs Associate
- Investment Banking Job For Graduates (Engineers) | Top 8 Tips
- How to get an Investment Banking Internship?
- Top 10 Finance Certifications Programs
- Investment Banking Lifestyle
- Investment Banking Exit Opportunities
- Investment Banking Case Studies
- Top 10 Best Finance courses (with Online Certification)
- Investor Relation Job Description
- Financial Analyst Job Description
- Investment Banking vs Equity Research
- Investment Banking vs Asset Management
- Commercial Banking vs Merchant Banking
- Investment Banking vs Corporate Banking
- Portfolio Management vs Investment Banking
- Investment Banking vs Hedge Fund Manager
- Investment Banking vs Investment Management
- Investment Banking vs Private Equity
- Careers in Trading
- Investment Banking Firms
- Top Bulge Bracket Investment Banks
- Top Middle Market Investment Banks
- Top Boutique Investment Banks
- Investment Banking in Dubai
- Investment Banking In Nigeria
- Investment Banking in Abu Dhabi
- Investment Banking in Hong Kong
- Investment Banking in Russia
- Investment Banking in Brazil
- Investment Banking in China
- Investment Banking in Australia
- Investment Banking in Saudi Arabia
- Investment Banking in Singapore
- Investment Banking in London (UK)
- Investment Banking in India
- Investment Banking in Ireland
- Investment Banking in South Africa
- Investment Banking in Canada
- Investment Banking in Germany
- Investment Banking in France
- Investment Banking in Malaysia
- Investment Banking in Philippines
- Investment Banking in Boston
- Investment Banking in San Francisco
- Investment Banking in Chicago
- Investment Banking in Atlanta
- Investment Banking in Toronto
- Top Banks
- Top Banks in Australia
- Top Banks In Austria
- Top Banks In Bahrain
- Top Banks In Belgium
- Top Banks In Bermuda
- Top Banks In British Virgin Islands
- Top Banks In Brunei
- Top Banks In Canada
- Top Banks In Cayman Islands
- Top Banks In Denmark
- Top Banks In Finland
- Top Banks In France
- Top Banks In Germany
- Top Banks In Greenland
- Top Banks In Guernsey
- Top Banks In Ireland
- Top Banks In Isle of Man
- Top Banks In Japan
- Top Banks In Kuwait
- Top Banks In Liechtenstein
- Top Banks In Luxembourg
- Top Banks In Macau
- Top Banks In Norway
- Top Banks In Oman
- Top Banks in Pakistan
- Top Banks in Philippines
- Top Banks In Puerto Rico
- Top Banks In Qatar
- Top Banks In Saudi Arabia
- Banks in South Africa
- Top Banks In Singapore
- Top Banks In South Korea
- Top Banks In Sweden
- Top Banks In Switzerland
- Top Banks in UAE
- Top Banks in United Kingdom
- Top Banks in USA
- Banks in Nigeria
- Top 10 Banks in Netherlands
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- 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
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
What is the Lobster Trap Defense?
Lobster trap in finance is a tactic used by the targeted company to prevent any hostile takeover. In this tactics the owners of more than 10% of converting securities of the company won’t be able to convert the securities into voting stock. The tactic prevents the big fish from swallowing the small ones and it is not applicable to the small threats.
- This is one of the strategies that small companies use to prevent big companies from taking them over.
- This unique name is one of the newest additions to the anti-takeover lexicons and this strategy perfectly works for all targeted companies that are cautious enough to include the clause of ‘lobster trap’ in the agreement.
- This trap is applicable for all sorts of convertible securities like convertible debentures, convertible preferred shares, convertible bonds, and convertible warrants.
Example of Lobster Trap
Let’s say that HD company has been doing well in TV manufacturing. They’re new in the market, but they have been giving a serious threat to a big player called BD & Co. On the other hand, 15% of the convertible securities of HD company is owned by a big company called Mitte Inc. Since a reasonable part is owned by the Mitte Inc., it can be a matter of concern for HD company since big fish like BD & Co. can swallow them without much effort and using the securities of Mitte Inc.
Now, since HD company can see that BD & Co. can try to take over the company, they’re feeling a serious threat. But the good news is while signing the agreement with Mitte Inc., they included a clause stating that Mitte Inc. won’t be able to convert their securities into voting stock (think about the specificity of the these trap where it’s mentioned that if a company or an individual owns over 10% of the convertible securities of the firm, the company or the individual won’t be able to convert the securities into voting stocks).
Since this clause is added, HD company is now safe. And BD & Co. won’t be able to take over their new competition by easy means. This only happened because the management made a prudent decision at the time of signing agreement with the Mitte Inc. And this particular tactic is saving the company from getting swallowed by the big fish is called the lobster trap.
How Effective the Lobster Trap is?
The effectiveness of the lobster trap depends on how far-fetched the board of directors of a company can think. If a company becomes complacent and can’t see serious threats from their big competitors, then they won’t be cautious and would be easily swallowed by the big fish.
Like the example we saw above, the management was prudent enough to include a clause in the agreement that saved them from the big competitor. It’s important to know that this trap isn’t effective for similar or small companies. It is only applicable for big and giant companies and it prevents big companies from forcefully taking over a small business.
Why the term ‘lobster trap’ is added to the lexicon of the anti-takeover tactics?
There must be a reason why the term ‘lobster trap’ is used when we talk about preventing hostile takeovers from big fishes. The reason is simple. It’s exactly like catching lobster.
The size of the lobster is prodigious. It has a huge cylindrical body and the most important part is the first five pairs of the lobster are transmuted into pincers. When this trap is created, it’s created to catch the lobster only and not the small ones.
That’s why only the big, giant lobster gets trapped in the trap and other small ones manage to escape. In terms of a lobster trap as an anti-takeover strategy does the same thing. It doesn’t take into account the small players. It only gets created to prevent the big fish to forcefully take over the targeted company.
That’s why the term ‘lobster trap’ is added to the lexicon of the anti-takeover tactics.
Why Different Strategies like ‘Lobster Trap’ are Created?
To be precise, the world of business is not always the bed of roses. People do things that shouldn’t be done at all. In this age of collaboration of information overload also, many businesses use power and influence to persuade a smaller entity to do something that they never want to do at the first place.
- One of such things is forcing smaller entities to surrender to the power and the influence of a big fish. If the smaller entities don’t agree voluntarily, the big fishes turn to different unethical tactics to make them stoop down on their knees.
- To save their small businesses from these giant and their unethical and forceful actions, these small entities follow one of many anti-takeover strategies so that they can fight till they can and prevent a hostile takeover.
- It is one of many anti-takeover strategies that the small firms use to be on the safest side.
- Other than this, the target companies also use many tactics like a poison pill, golden parachute, scorched earth policy etc.
Advantages of the Lobster Trap
Let’s quickly look at few key advantages of the lobster trap –
- The most significant advantage of this trap is that it binds the owner of 10% or more convertible securities to a certain extent. It means the owner of these convertible securities or a big fish won’t be able to take advantage of it.
- Without owning more stocks in the company, it won’t be easy for a big fish to forcefully take over the target company.
- This trap can only be beneficial in hindsight. If it were not being done, it wouldn’t be effective. That means the effectiveness of this trap also lies in the efficiency of the top management.
The lobster trap is a great strategy. But it would work best when it is coupled with other strategies. Because sometimes little things become big things. In it, little players are not given attention and the trap is created to capture a/many big fishes.
This has been a guide to what is Lobster Trap Defense. Here we discuss this top anti-takeover strategy along with examples of the Lobster trap, how Effective Lobster Trap it is and its advantages. You may also take a look at useful articles below: