M&A is a trend that is not going away. It is therefore interesting to understand the different kind of defenses that is available to a target company.

We can broadly classify defenses into two categories:

• Pre-offer Defenses
• Post-offer Defenses

Pre-offer defense can be in various forms like:

1. Assets Revaluation

This will make shareholders aware of the higher share value hence will not find the idea of a take-over appealing

2. “Golden Parachutes”

This involves entering into service contracts with directors, which requires the predator company to pay hefty compensations to them upon a take-over, and their removal if the predator company wants to control the composition of the board.

3. “Poison Pills” or “Share Repellent”

Can be in various forms like:

• Company taking on a huge debt to pay special dividends to the shareholders and the predator company has to assume the debt upon the take-over.
• Another situation is whereby the shareholders are given preferential rights to buy loan stocks or preference shares at low prices. In the event of a take-over, they are entitled to convert these (shares, loan stocks and preference shares) into the target company’s equity shares or the predator company has to repurchase these at a high price. In this case, it acts as a “repellent” against the predator company (called the shark).

For the aforesaid situations, the good point is it discourages the predator but if the takeover is aborted, the target company will be heavily in debt hence “poisoning” itself,

4. Staggered Board

The board may consists of 3 groups, with 1 group being elected each year. Hence in a take- over, the predator company cannot control the composition of the board for sometime.

For Post-offer Defenses:
The norm in post-offer defenses is to reject or criticize the offer from the predator company by citing that the target company is being grossly undervalued as it has very good future prospects, in the case of a share swap, the predator company’s shares are overvalued, the business of the predator is not compatible with the target company, the predator company’s rationale being untrue or exaggerated or there is doubt of the predator’s company management ability and past, present and future track record

Where the reject or criticize tactics failed, the target company needs to seek a “ white knight’. In this case, this involves inviting a friendly party for whom a take-over makes sense, to bid for the company (normally at a higher price) and the company would agree to the take-over.

If the target company deems it is rationale , the target company may even make a counter-bid for the predator company.

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