How to Defend Against a Hostile Takeover

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Whether it's Oracle and PeopleSoft, Verizon and Vodafone, or Comcast and Disney, nothing whets the appetite of the financial press more than a hostile takeover bid. If an avaricious company comes hunting for your firm, set the bait with a dose of poison. Here's the potion, as well as some other evasive maneuvers.

Formulate a poison pill the hostile buyer won't want to swallow. Also known as a shareholders rights plan, this makes a takeover prohibitively expensive by granting existing shareholders the right to purchase newly issued stock at a greatly reduced price.

Establish an exercise price--the amount shareholders will pay to buy additional shares. Include a dilution adjustment factor. Many shareholders rights plans state that the company will issue shares with a current market value of twice the exercise price.

Set a redemption price. This is a nominal sum--often $0.01 per right--for which shareholders may redeem the rights before they are exercisable.

Set a trigger to launch the shareholders rights plan. For example, have the plan go into effect when someone tries to acquire a certain percentage of outstanding total shares--typically 15 to 20 percent, but sometimes as low as 10 percent.

Set a time limit on the plan's terms. Ten years is common.

Buy back some of your own shares. This is a common defensive measure for both large and small corporations. Of course you'll need to have available capital.

Examine your corporate charter. Clauses may exist that provide for removal of directors only for cause or for staggered board terms. The latter make it difficult for the stalking company to eliminate an entire board via a proxy vote and replace it with directors more receptive to the takeover.

Research your state's corporation laws, which often include antitakeover provisions. Consult your attorneys about adding an amendment to your bylaws to make a takeover more difficult.

Install a company benefits plan with expensive change-ofownership provisions.

Spin off a fast-growing subsidiary, thus reducing your company's appeal. Be sure to get your attorney's advice on the legality of the divestiture.

Enter into a partnership with another company and include a large breakup fee in the agreement. A hostile acquiring company would then have to pay a significant fee to your partner when purchasing your firm.

Respond rapidly and fervently at the first hints of a takeover attempt. The best tactic may be a combination of the above. Many companies, for example, will fight back with both a stock repurchase plan and a spin-off of one or more divisions.

Tips & Warnings

  • Simply put, the stalking company attempts to gain control over its target against the wishes of the latter's management, usually through a stock bid, but sometimes through an attempt to replace the board of directors.
  • Seek out a white-knight company who is a more acceptable buyer. This is not just fairy-tale talk. In some sectors, 20 to 30 percent of companies stalked by hostile buyers find white knights.
  • Beware the poison pill that becomes a suicide pill or "Jonestown defense" if it results in taking on so much debt that it sends the company into bankruptcy.

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