Shark Repellent

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.

Explanation

In the competitive world of acquisitionsAcquisitionsAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. read more, takeoversTakeoversA takeover is a transaction where the bidder company acquires the target company with or without the management's mutual agreement. Typically, a larger company expresses an interest to acquire a smaller company. Takeovers are frequent events in the current competitive business world disguised as friendly mergers.read more, and mergersMergersA merger is a voluntary fusion of two existing entities equal in size, operations, and customers deciding to amalgamate to form a new entity, expand its reach into new territories, lower operational costs, increase revenues, and earn greater control over market share.read more, 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?

Shark Repellent

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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.

Examples of Shark Repellent

Practical Example

A classic real-world example of shark repellent defense is the White knightWhite KnightA 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 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.

Advantages

  • 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.

Disadvantages

  • 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.

Conclusion

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, sandbagSandbagSandbagging refers to the lowballing strategy adopted by an individual or company to lower down estimations of success. It is a corporate approach at lowering the shareholders' or investors' success or growth expectations to produce higher or perform better than the expected results.read more, 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.

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