HR Management Study help analysis on: Defensive strategies in White Knight
Defensive Strategies
There are various tactical defensive strategies available to target companies in order to avoid the hostile bid such as
Friendly purchase of shares
To stave off the takeover bid the directors of the company may persuade their friends and relatives to purchase the shares of the offered company as they themselves cannot indulge into the game without serious violation of the existing rules and regulations or statutory prescription despite the bona fide defense against the bid. Hence directors of the company have to take protective steps to persuade their friends to be shareholders in supports of their management and control of the company under threat of takeover bid.
Emotional attachments, loyalty and patriotism
To ward off takeover bids, the board may make attempt to win over the shareholders through raising their emotions for continued association and attachment with the company as shareholder and raising fears in their mind towards changes of the name of the company, independence of business and goodwill, etc. Particularly, institutional shareholders might yield to these reasoning. Similarly, takeover bid from a foreign controlled company could be warded off by invoking national interest and emotional feelings. Much will depend upon economic circumstances, political climate and the prospects of the trade in which the company is engaged. Arguments could also be made of the possible consequences which follow on takeover like retrenchment of work force, displacement of managerial, technical and financial executives, shifting work place and all possible miseries resulting from the successful takeover bid. Many times, such appeal works well to raise sentiments of shareholders to support the board of directors and confide with the management.
Recourse to legal action
To dissuade the corporate raider, the target company can refuse registration of transfer of any of the grounds given under relevant sections of the Companies Act. (Auerbach, 1991)
To sum up, it is the responsibility of the directors to accept a takeover bid or thwart it away in the interest of the company. In averting the takeover bid the directors are not absolved of their liability under the law for making any wrong statements and painting in words any unrealistic position into high hopes for the future of the company. For example, profit forecasts made by them in the context of fighting off the takeover bid should be realistic, based on viable assumptions. In other words, they should not indulge in fraudulent acts against the interest of the shareholders.
Operation ‘White Knights’
‘White knight’ is the term used in UK Financial markets for a bidder in acquisition pursuit. White knight enters the fray when the target company is raided by a hostile suitor. White knight offers a higher bid to the target company than the present predator who might not remain interested in acquisition and hence the target company is protected from losing to the corporate raid. (Fred, Chung & Sui, 1998)
Disposing of “Crown Jewels”
It is observed by the researcher that the costly assets of companies are referred as Crown of Jewel to know the greediness of the purchaser companies in the situation of takeover bid. It can be seen that the costly and attractive assets of companies magnetize the raider to offer for the control of target companies. This defense is very much in vogue in UK but subject to regulations of ‘City Code’.
‘Pac-man’ strategy
In this strategy target companies want to takeover the aggressive raider and this situation arises when target companies are relatively larger than the raider (Auerbach , 1991)
Compensation packages viz: “Golden Parachutes” or “First Class Passengers” strategy
This strategy is very common in USA and UK and it helps in deciding the retirement and termination package of senior employees. It can be analyzed that this strategy can be used by companies in order to provide protection to directors at the time of an aggressive takeover bids.
“Shark repellent” character
The companies change and amend their bye-laws and regulations to be less attractive for the corporate raider company. Such characteristics in the eyes of bye-laws are referred as “Shark Repellent” character. US companies adopt this tactic as a precautionary measure against prospective bids. For example, shareholders approvals for approving combination proposal are fixed at minimum by 80-95% of equity shareholders. And for this purpose consent of board of directors is also needed.
Swallowing “Poison Pills” strategy
According to Swallowing Poison Pills strategy there are various changes that can take place in strategies. For e.g. Target companies may raise convertible debt in order to convert into equity in an upcoming time to discourage the efforts made by the offeror.
Green mail
In green mail it is observed that the great numbers of shares are held by non friendly companies which pressurize the target companies to again purchase the shares at an ample premium to avoid the takeover (Fred, Chung & Sui, 1998)
Poison put
In poison put an agreement allows the debt holder to insist repayment in the occasion of an aggressive takeover.
Grey knight
It is observed that according to Grey knight an affable party of the intention company wants to takeover the competitor.
Defensive Strategies for Takeover Bids
It is analyzed by the researcher that globally companies do not have sufficient defensive strategies in order to face the danger from the takeover bid. The below mentioned defensive strategies will help companies in order to face global competitiveness.
Establishment of non-voting shares
It is observed that with the establishment of non voting shares would help companies in order to raise resources and input from the money and capital market without destroying the stake of promoters (Fred, Chung & Sui, 1998)
Eliminations of constraints on inter-corporate investments
It is observed that elimination of constraint on investments of inter corporate under the Companies act 1956, will help the group of companies to come together for save of each other in situation of facing threats from takeover. This elimination of constraints on inter corporate investments will help the company in improving liquidity problem and provides opportunity to grow vertical and horizontal.
Function of local financial institution
It is observed that in case of severe takeover bids, the institution of finance must take standardized policies in order to support established companies who are having good record and ensure them that the management of companies will not ruin( Fred, Chung & Sui, 1998)
Defending new projects
It is observed that security should be needed to manage the small viable projects costing to Rs 5 to 10 crores after their implementation because companies are required to face severe takeover threats for achieving the higher profitability.
Danger from MNCs
It is observed that to manage the threats of takeover from blue chip international companies it is required for companies to take approval of Board of Foreign Investment promotion rather than from the approval of shareholders
It is observed that target companies may use mixture of various strategies for successfully avoiding the aggressive takeover bids. All the discussed strategies are knowledge based and had been effectively implemented in develop nations such as USA and UK. In various situations and even, the scope for possibility of more quick strategies always rest for the target companies to protect their survival against hostile takeover bids.
The strategies used by Cadbury to albeit unsuccessfully defend the bid by Kraft.
It is observed by the researcher that the Cadbury released the defensive document to the investor and in that document it was written its better to remain independent business rather than accepting unwanted proposal from Kraft (Elena, 2010)
It is observed that the Cadbury Company wanted to be independent for that the company had designed some strategy and restricting plans like policy for high growth in a rising market (Michael, 2010)
The chairman of the Cadbury Company Carr released a defense document to shareholders that the business of the company is incomparable and valuable than the proposal came by Kraft. In defense document chairman had mentioned to shareholders that assets of the company are catchy with fortunate footprint in comparison to other companies in the industry (Elena, 2010)
The chairman of the Cadbury explained to shareholders that Kraft wanted to buy Cadbury in cheap in order to provide profitability to their low growth model of the business. The chairman of the Company requested to shareholders doesn’t let Kraft to steal Cadbury.
It is observed that the British investor had also supported the Cadbury Company to reject the bid because according to British investors the company valued at least 850p per share and the Kraft was offering only 740 p per share (Elena, 2010)
The Cadbury wanted from its shareholders to recognize that there are intangibles in the Company. A complete part of defensive document had a note to the company values regarding ethical considerations and minimizing the impact on the surroundings.
It is observed that the maker of Cadbury maker revealed a defense document against an aggressive bid from Kraft. In defensive document it was written that the company full year growth of the revenue and margin of profit will thrash expectations of the market (Michael, 2010)
It is observed by the researcher that Kraft shares and cash were worth 727 pence against Cadbury share price of 790 pence. This was also the reason for the Cadbury to reject the bid because the market situation of the Cadbury was stunning as compared to Kraft. Most of the analysts believed that Kraft should pay 820 to 850 pence in order to buy Cadbury (Elena, 2010).
It is observed by the analyst that, the defensive strategy of Cadbury was based on constancy to limit the influence of hedge funds. According to researchers if the company had more hedge funds then Kraft could put the lower offer and buy the business of the Cadbury in cheaper (Michael, 2010)
It is observed that the chairman of the Cadbury had revealed to shareholders that share part of Kraft was not attractive because of bad performance of delivery. This was also the reason for the chairman of the Cadbury to reject the bid proposal (Williams, 2010)
Another reason of rejecting the bid proposal by Cadbury because Kraft had not kept records of missed financial statements.
In order to defend the takeover bid from Kraft the Cadbury Company came out with standalone strategy. The company had revealed vision of high growth for an independent future. It is observed that the company had raised the target of underlying sales growth from 4 to 6 % range to 5 to 7 %.The chairman of the company had also announced that the dividend payout ratio of the company will be in double digits after 2010 and operating cash flows would be converted into cash from 2010 onwards. These all strategies such as expected high growth in future and conversion of operating cash flows into cash helped the Cadbury Company to reject the bid from Kraft (Williams, 2010)
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