What is Shark Repellent?
Shark repellent refers to strategies, mostly periodic or continuous, that target companies or public businesses, take in order to ward off the acquirer in case of a hostile or unwanted takeover.
In the competitive world of acquisitions, takeovers, and mergers, companies try to protect the interests of the business as well as the shareholders by employing certain measures that guard the companies against bigger or aggressive players that intend at hostile takeovers.
Shark repellent stems from the idea that a company’s actions seeking to take over other businesses are termed as shark attacks, and the company itself is termed as a predator. They are the defensive strategies or tactics that companies implement to deter the attacks.
How Does Shark Repellent Work?
Businesses are in constant threat of hostile takeovers where one company, called the target, is acquired by another company, called the acquirer, without any mutual agreement. Hostile takeovers aim at replacing the target company’s management so that acquisition is approved. The defense strategies that are now popular have been the effects of historic takeovers and attempts to ward them off.
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- Macaroni Defense: A tactic used by companies by issuing a large number of bonds that must be redeemed at a higher price if the company faces takeover such that the aggressor is cautioned. Take, for instance, a company AAA Ltd. that wants to take over the business of BBB Ltd. issues 100,000 bonds redeemable at 125% of the issued value in the event of a change of control. This situation can ward off AAA Ltd. from taking the deal further because of the higher premium that it will have to pay to the bondholders.
- Staggered Board: In a staggered board strategy, the company makes elections to board in such a way that at any given time, only a fraction of board members is elected, thus avoiding any possibility of change of control during the election to the board.
- Golden Parachute: A golden parachute is a strategy where large compensation is guaranteed to the top management of the company should they be dismissed due to takeover or merger; thus, helping as an anti-takeover strategy.
- Supermajority: As the name suggests, supermajority mandates the majority of shareholders to approve the takeover initiative. Thus, it becomes difficult for the takeover company to convince the many numbers of shareholders to satisfy the majority.
- Poison Pill: In a poison pill tactic, the target company dilutes the shareholding buy issuing more shares at a discount, thus making the takeover bid a difficult process and rather expensive
- People Pill: A people pill strategy is a simple way of proactively warding off the predator. It is worked out by the management by announcing that it will resign from the position in the event of a change of control. This makes the acquirer skeptical of his decision because of the fear of losing an experienced and good management team.
Examples of Shark Repellent
- The case is related to Saxon Industries when an American investor-owned more than a 9.9% stake in the corporation. Saxon Industries, fearing takeover attempts, paid the investor a high premium for buying back shares. At a time when the Saxon stock was trading at $7.21 per share, Saxon paid the investor a premium as high as $10.50. This was a luring 45% premium pay, which the investor could not deny. Such a defense strategy is known as ‘greenmail.’
- Another example of shark repellent defense was Oracle v PeopleSoft Inc, which dates to June 2003. People Soft Inc, in an attempt to deter Oracle from taking it over, paid its customers a five-fold rebate on the license fee. The takeover bid was pegged at $7.7 billion.
A classic real-world example of shark repellent defense is the White knight defense tactic. A leading electronics equipment maker, AMP, Inc., used this strategy against Allied Signal Corporation, which worked in the aerospace sector. Allied Signal Corp. made a $10 billion bid for taking over the AMP, Inc. As a defense, AMP, Inc; executives offered a friendly bid to be made by another company that could potentially avoid a hostile takeover by Allied Signal Corporation. This friendly bid was made by Tyco, Inc. The deal was a stock-for-stock swap, which had a total consideration of $11.3 billion.
- Using shark repellent tactics fends off unwanted or hostile takeover attempts, in which case the predator finds the target less attractive because of the deployed tactics.
- Shark repellent strategies like a poison pill, supermajority, and scorched earth help form formidable defense around the business such that the business, the management, and the shareholders are protected.
- Unwise use of these tactics can backfire greatly. Take, for instance, the macaroni defense, which protects the business by issuing bonds redeemable at a higher price. If the premium is high and the predator wards off, the company is entitled to fulfill redemption obligation.
- Sometimes management uses tactics of defense against takeovers that are not in the best interests of the shareholders. A management that has performed poorly but still wanting to retain control of the board may deploy tactics that prohibit takeover, which can be fruitful for the business needs and shareholder interests.
- Every strategy, when employed, makes management count for costs. It is always a trade-off between the costs of deploying such strategies and accepting the fate of a hostile takeover.
Shark repellent strategies have proven to be warding off predators successfully. With each takeover attempt, the target company management comes up with strategic actions, and the most successful ones are recorded in history. Some popular tactics are macaroni defense, white knight, sandbag, golden parachute, and a poison pill. The history of mergers and acquisitions has evolved with every successful or unsuccessful deal that happens in the market. Management teams use shark repellents to fight off acquisition or a takeover attempt, but the real interest of shareholders, rather all stakeholders, is not addressed all the time.
This has been a guide to what is Shark Repellent. Here we discuss practical examples and how does shark repellent works along with advantages and disadvantages. You may learn more about financing from the following articles –