๐‡๐จ๐ฐ ๐๐จ๐ž๐ฌ ๐š ๐ฉ๐จ๐ข๐ฌ๐จ๐ง ๐ฉ๐ข๐ฅ๐ฅ ๐ฐ๐จ๐ซ๐ค?

๐‡๐จ๐ฐ ๐๐จ๐ž๐ฌ ๐š ๐ฉ๐จ๐ข๐ฌ๐จ๐ง ๐ฉ๐ข๐ฅ๐ฅ ๐ฐ๐จ๐ซ๐ค?

Hostileย #mergersandacquisitionsย happen when a publically listed target company performs poorly over a period and an acquirer, either within the same industry or different, intends to acquire the target company at a premium.

Generally, the buyer approaches the target board or CEO with an offer to acquire the firm and intends to have a friendly deal. However, when the target board refuses to accede to the buyer’s offer price, the buyer approaches the target shareholders ๐๐ข๐ซ๐ž๐œ๐ญ๐ฅ๐ฒ ๐ฐ๐ข๐ญ๐ก ๐š ๐ญ๐ž๐ง๐๐ž๐ซ ๐จ๐Ÿ๐Ÿ๐ž๐ซ.

The buyer’s rationale for the bid is that they can operate the firm better than the target by investing capital in better projects, financing investments at lower cost, and returning excess cash to shareholders through dividends/buybacks.

To counter the buyer, the target firm employs pre-takeover defences. For example, the #poisonpill is a popular takeover defence as it raises the buyer’s acquisition cost.

 

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For instance, let us assume the following:
CMP of target firm pre-hostile bid = $10
Target firm shares pre-deal with public = 100
Management stake = 35% and public stake = 65%

The buyer approaches the target shareholders with a tender offer with the following:
Offer price/Share = $14 for acquiring 65% stake

Fearing that the target shareholders will tender their share at a 40% premium, the target board adopts a poison pill by allowing existing shareholders to buy one additional share at a nominal price (Let us assume it as $2/share). If the target shareholders exercise, the outstanding shares double to 200, which effectively doubles the offer price for the buyer.

Though the ๐ฉ๐จ๐ข๐ฌ๐จ๐ง ๐ฉ๐ข๐ฅ๐ฅ ๐ข๐ง๐œ๐ซ๐ž๐š๐ฌ๐ž๐ฌ ๐ญ๐ก๐ž ๐ญ๐š๐ค๐ž๐จ๐ฏ๐ž๐ซ ๐œ๐จ๐ฌ๐ญ, ๐ข๐ญ ๐š๐ฅ๐ฌ๐จ ๐๐ข๐ฅ๐ฎ๐ญ๐ž๐ฌ ๐ญ๐ก๐ž ๐ฆ๐š๐ง๐š๐ ๐ž๐ฆ๐ž๐ง๐ญ ๐จ๐ฐ๐ง๐ž๐ซ๐ฌ๐ก๐ข๐ฉ ๐š๐ง๐ ๐ญ๐ก๐ž ๐จ๐ฏ๐ž๐ซ๐š๐ฅ๐ฅ ๐ญ๐š๐ซ๐ ๐ž๐ญ ๐ฉ๐ซ๐ข๐œ๐ž. Thus, in my experience, the poison pill is a ๐ง๐ž๐ ๐จ๐ญ๐ข๐š๐ญ๐ข๐จ๐ง ๐ญ๐š๐œ๐ญ๐ข๐œ adopted by a shareholder to increase the acquirer’s bid cost and not to prevent the takeover.



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