3. Defending against mergers Aa Aa Many mergers are the result of a friendly and

Question

3. Defending against mergers Aa Aa Many mergers are the result of a friendly and collaborative agreement between the participating companies. Some combinations, however, are unfriendly or even hostile in nature. Firms facing unwanted and hostile takeovers will often take actions to forestall the acquisition. In general, the broad category of antitakeover strategies are called Consider the following technique: This type of financial security will have value only if an unfriendly takeover occurs. It gives the firm's bondholders the right to redeem their bonds at their par value prior to maturity if a unfriendly bidder obtains control of a specified percentage of the target firm's common shares. This technique, which is called , is designed to: O Make the takeover target a less attractive takeover candidate by restructuring its debt and reducing its available cash balances O Make it difficult for an acquiring firm to elect its own directors to the board O Make it significantly more difficult for the takeover vote by the firm's shareholders to be successful

Explanation / Answer

1) These are called defensive tactics. This includes Poison pill, Goldern parachutes and scorched earth policy.

Posion pill. Here shares are offered to exsiting shareholders at bargaining price, if they take it then it will dilute the holding to new holder. Thus preventing takeover

Goldern parachutes : Here key employees and manger will leave company with very high severance pay making company look unattractive to take over

Scorched earth policy : Here Valuable asset of the company are sold off. Thus for takeover perspective company looks unattractive.

2) Scorched earth policy and is design to make target takeover less attractive by restructuring it's debt and reducing available cash.

3) Asset or liability restructuring defence : Here most desirable asset are sold off by the company so that it will look unattractive for take over. For eg. Telecom rights by telecom company. This method is also called crown jewel defence.

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