Show Stopper in M&A

Show stopper is the laws and regulations that make the hostile takeover an impossible task or very expensive as the concerned authority can pass the orders related to anti-takeover terms if required that helps in preventing the hostile takeover attempt by the bidders in the industry.

What is Show Stopper in M&A?

Show Stopper refers to any law or regulation, which makes the possibility of a hostile takeover impossible or unnecessarily expensive. It could be in the form of a legislative act or a court order. For instance, a target firm may convince the state legislators to pass/tweak anti-takeover laws preventing a hostile takeover.

Show Stopper

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Source: Show Stopper in M&A (wallstreetmojo.com)

Top Show Stopper Options

Let us analyze some of the show stopper options considered by firms:

#1 – Scorched Earth Policy

This option of show stopper includes tactics for making the target company less attractive to the hostile bidders. The terminology has a military origin and is considered a last-ditch effort before either succumbing to the take-over or winding up the business. Some of the options are:

Such measures also have drawbacks and can also backfire. E.g., the hostile firm may seek an injunction against the defensive actions of the company. Let’s say, a steelmaking firm may threaten to purchase a manufacturer entangled in the legal battle for producing poor quality parts. In this case, the intention of the target firm will be to purchase the futuristic liabilities in an effort to burden the new company with those liabilities causing it to be unattractive to hostile bidders. However, the bidder may counter the same by securing a court injunction preventing the actions of the target firm.

#2 – Shark Repellents

Shark Repellent options of show stopper are continuous or periodic efforts imposed by management for locking out hostile takeover attempts. It involves making special amendments to the bylaws in favor of the target company when the takeover attempt is made public. The prospective takeover may or may not be in favor of the shareholders, and attempts have to be analyzed on a case to case basis. Some of the common examples are:

Golden Parachute

It involves including a provision within the contract of the executive, which will offer them a substantially large compensation if a takeover attempt is successful. It could be cash and stock, making it costly and less attractive to acquire the firm.

This clause predominantly protects the senior management under threat of termination if a takeover materializes. However, there is a possibility of executives deliberately using the clause to make it attractive for the acquirer to pursue the acquisition with a promise of massive financial compensation.

An example is of Meg Whitman (CEO of Hewlett Packard), who is entitled to receive $9 million if the firm is taken over and more than $51 million in case of termination.

Poison Pill

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 indicates an event that significantly raises the cost of acquisitions and creating large disincentives to prevent such attempts. It includes methods such as:

  1. Take a large sum of debt impacting the financial statementsThe Financial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more leaving the firm unprofitable and overleveraged.
  2. Creating employee stock ownership plansEmployee Stock Ownership PlansEmployee stock option plan (ESOP) is an “option” granted to the company employee which carries the right, but not the obligation, to buy a promised number of shares at a pre-determined price (known as exercise price). read more which get activated only when the takeover is finalized;

However, firms should be careful while implementing this strategy as they can give rise to high costs and not necessarily in the long term interests of the stakeholders. The two types of poison pills are ‘flip-in’ and ‘flip-over’ poison pill.

Staggered Board of Directors

The focus is to spread the appointment of directors over a period of time. The firm could perhaps elect a new board of directors every 2 years, making it difficult for an acquirer to influence the majority of directors at the same time. There is a possibility of a difference of opinion arising and not offering enough time for the acquirer to make a complete decision.

#3 – Supermajority

This tactic of show stopper is provided in the bylaws of the firm, which is activated when an acquirer initiates a takeover attempt. This strategy requires around 70-80% of the shareholders to accept the takeover making it difficult for the acquiring firm since a huge number of stocks will be required to gain a voice in decision-making.

E.g., Duke Energy (US electric power holding company) used a tactic requiring 80% of total outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more for a takeover. The proposed amendment was to eliminate supermajority voting requirements in Duke’s Restated Certificate of Incorporation of Duke Energy Corporation.

Example of Show Stopper

There are specific additional examples of show stopper we can study:

Show Stopper Example #1

An American high profile investor by the name of Ronald Perelman was consistently interested in taking over Gillette post successfully acquisition of Revlon Corporation. It appeared that Perelman would proceed with a tender offer for Gillette, which in turn was countered by paying $558 million to Revlon in return for an agreement that it would not make any tender offer to stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.read more of Gillette. To make this a fool-proof plan, Gillette further paid an additional $1.75 million to Drexel Burnham Lambert (a significant investment banking firm). In return, Drexel Burnham Lambert agreed not to participate in any takeover involving Gillette for 3 years.

Show Stopper Example #2

Brown Forman Corporation (Wine and Spirit maker) attempted a hostile takeover of Lenox (a significant producer of bone china ceramics, collectibles, and giftware). Forman offered the public shareholders worth $87 per share of Lenox, which was then traded at $60 per share at the NYSE. Martin Lipton, working for Lenox, suggested to offer a ‘Special Cumulative DividendCumulative DividendA cumulative dividend is a promise of paying a fixed percentage of earnings to the preferred shareholders. If the company cannot pay the dividend within the pre-decided date, then the dividend gets accumulated and is paid in the future. Cumulative dividend = Preferred dividend rate * Preferred share par valueread more’ to all the shareholders. The dividend was offered in the form of convertible preferred stockConvertible Preferred StockConvertible 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, which the shareholders of Lenox the right to purchase the shares in Brown Forman Corporation at a deep discount on account of any hostile takeover initiation. The strategy proved to be a success as Brown Forman was forced to hike the offer and enter into a negotiated agreement for the acquisition of Lenox.

Show Stopper Example #3

AMP Inc (a leading maker of electronics equipment) executed a ‘White Knight’ defense strategy against a $10 billion takeover bidTakeover BidThe price offered by the acquiring company to the target company to purchase the company is known as a takeover bid. Such bids are typically placed by larger companies to buy smaller companies in the market and the bids can be in the form of cash, equity, or a combination of both.read more by Allied Signal Corporation (aerospace and automotive parts producer). As a part of this strategy, the company reached out to a friendly bidder for aid and negotiated to be acquired by an ally instead of a hostile corporate. AMP-managed to strike a stock-for-stock swap deal for $11.3 billion with its white knight, Tyco Inc, which was a Bermuda based conglomerateConglomerateA conglomerate is a company or corporation made up of different businesses that operate in various industries or sectors, often unrelated. It holds a stake in multiple smaller companies that choose to manage their business separately to avoid the risk of being in a single market, thus, taking advantage of diversification.read more.

This article has been a guide to Show Stopper in M&A. Here, we discuss the types of show-stopper options considered by firms (including Scorched Earth Policy, Supermajority, and Shark Repellents) along with some examples. You may also have a look at our suggested articles:-

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