Takeover bids: Strategies and defence mechanisms
Takeover bids are one of the most dramatic and strategic mechanisms in the financial markets. Whether friendly or hostile, they enable a company to acquire control of another publicly traded company by approaching its shareholders directly. For finance students and M&A professionals, understanding the dynamics of takeover bids and defence strategies is essential to grasping the challenges of stock market battles.
Read more : Basel 1, Basel 2, Basel 3: Evolution of banking regulations and preparation for Basel 4
The two faces of takeover bids: friendly and hostile
A takeover bid can take two main forms, depending on its approach and how it is received by the target.
A friendly takeover takes place with the agreement of the target company's management. It usually results from prior negotiations between the two parties, which lead to a joint offer presented to shareholders. This type of transaction often allows for synergies between the two companies, accelerates a growth strategy or consolidates a sector. A friendly takeover offers the advantage of a smoother transition, with integration prepared in advance and a reduced risk of resistance from the target company.
A hostile takeover, on the other hand, is launched without the consent of the target company's management. The bidder bypasses management to address shareholders directly, generally offering a significant premium on the share price. This type of transaction is often perceived as aggressive and can trigger defence mechanisms on the part of the target. Hostile takeover bids are common in sectors undergoing consolidation or when the target is perceived as undervalued.
The motivations behind a takeover bid
There are various reasons why a company might launch a takeover bid:
• Creation of synergies (economies of scale, complementary activities)
• Acceleration of growth through acquisition rather than organic development
• Defence against a takeover bid of its own (preventive acquisition)
• Market opportunity (undervalued target company)
• Diversification of the business portfolio
Key stages of a takeover bid
1. Preparation and due diligence: The bidder evaluates the target, its assets, liabilities and prospects.
2. Public announcement: The offer is made public, along with its terms (price, payment method, duration).
3. Response from the target: Management may accept, reject or propose a counter-offer.
4. Shareholder campaign: The bidder attempts to convince the target's shareholders.
5. Deposit of securities: Shareholders who accept the offer deposit their shares.
6. Closing: If the control threshold is reached, the transaction is finalised.
Defence mechanisms against a hostile takeover bid
When faced with a hostile takeover bid, the management of the target company has several strategies at its disposal to defend itself or negotiate better terms.
1. Poison pill: This mechanism, which is very common in the United States, allows the target to massively dilute its capital in the event of a takeover attempt. In concrete terms, existing shareholders are given the right to purchase additional shares at a favourable price if an acquirer exceeds a certain ownership threshold (usually 10-20%). This dilution makes the acquisition costly and discourages the bidder. There are two main types:
• Flip-in: Shareholders (except the bidder) can purchase shares at a reduced price.
• Flip-over: Shareholders receive shares in the new entity at a reduced price after the acquisition.
2. White Knight: The target seeks another acquirer who is more acceptable than the initial hostile bidder. This ‘white knight’ usually makes a competitive offer, often more advantageous to shareholders. This strategy allows management to retain some control over the process. For example, when Sanofi launched a hostile takeover bid for Genzyme in 2010, Genzyme actively sought alternatives before finally negotiating with Sanofi.
3. Sale of the Crown Jewels: The target sells its most valuable assets to a trusted third party, making the company less attractive to the bidder. This tactic is risky because it can weaken the company in the long term, but it can be effective in discouraging a takeover bid. In 2018, Qualcomm attempted this strategy in response to Broadcom's hostile takeover bid before the deal was blocked by regulators.
4. Golden Parachute: Favourable contracts are offered to executives in the event of a change of control, increasing the cost of the acquisition. These clauses may include substantial severance payments or bonuses. Although controversial, they are intended to protect the interests of executives and discourage hostile takeover bids.
5. Pac-Man Defence: The target launches a counter-takeover bid on the bidder, turning the tables. This bold strategy is rare due to its complexity and cost, but it can be effective. It was used successfully by Martin Marietta against BTR in 1982.
6. Debt Overhang: The target incurs significant debt just before the takeover bid, making its acquisition less attractive. This debt can be used to buy back shares (leveraged recapitalisation) or to finance an alternative acquisition.
7. Change of legal status: Some companies change their status to become a limited liability company (LLC) or adopt a structure that makes a takeover bid more difficult. This approach is more common in certain countries where regulations allow it.
8. Friendly shareholder: The target finds a reference shareholder who acquires a significant stake, making it more difficult for the bidder to reach the control threshold. This friendly shareholder may be a sovereign wealth fund, another company or an institutional investor.
9. Shareholder Rights Plan: The target may amend its articles of association to give existing shareholders more power in the event of a takeover bid, such as additional voting rights or priority dividend shares.
10. Appeal to regulators: The target may highlight the competitive risks or regulatory issues that the acquisition would pose, prompting the authorities to block the transaction. This strategy was used successfully by Sprint in response to T-Mobile's takeover bid in 2014.
The limitations of defence mechanisms
Although these strategies can be effective, they also present risks:
• High cost for the target company and its shareholders
• Potential weakening of the company in the long term
• Negative perception by the markets if the mechanisms are perceived as anti-shareholder
• Legal risk in certain countries where these practices are regulated
Notable examples of takeover bids and defences
1. Kraft's hostile takeover bid for Cadbury (2010): Despite fierce resistance from Cadbury, including arguments about the quality of the company and appeals to regulators, Kraft ultimately succeeded in its £11.5 billion acquisition.
2. Airbus' takeover bid for Bombardier (2017): Although not hostile, this transaction showed how a company can restructure (by selling its rail division to Alstom) to focus on its core activities in the face of competitive pressure.
3. Pfizer's failed takeover bid for AstraZeneca (2014): AstraZeneca used a combination of communication about its long-term strategy and dividend promises to convince its shareholders to reject the offer.
4. Microsoft's takeover bid for Activision Blizzard (2022): Despite attempts by regulators and some shareholders to block the deal, it was finally approved after an 18-month battle.
The consequences for shareholders
Takeovers, whether friendly or hostile, generally have a significant impact on shareholders:
• Control premium: Target shareholders often receive a premium over the market price
• Strategic choice: They must assess whether the offer is in their long-term interest
• Risk of failure: If the takeover bid fails, the share price may fall
• Governance changes: A successful takeover bid usually leads to changes in management
What finance students need to remember
1. Understand the motivations behind a takeover bid (strategic, financial, opportunistic)
2. Analyse defence mechanisms and their implications for all stakeholders
3. Assess the consequences for shareholder value and corporate strategy
4. Master the regulatory aspects, which vary from country to country
5. Anticipate trends: takeover bids are cyclical and often linked to market conditions
Conclusion
Takeover bids are a fascinating aspect of financial markets, where strategy, finance and psychology intertwine. For finance professionals, mastering these mechanisms is crucial, whether to advise companies on their growth operations or to defend against takeover attempts.
Defence mechanisms are constantly evolving, with new tactics emerging regularly. Students who understand these dynamics will be better prepared for careers in M&A, corporate finance or investment. In the world of takeover bids, preparation, anticipation and strategic creativity often make the difference between success and failure.
In an era of shareholder activism and heightened regulation, takeover bids remain a powerful tool for industrial transformation, but their success increasingly depends on the ability to convince all stakeholders – shareholders, regulators and markets – of the strategic relevance of the transaction.
