Post by fastwalker on Sept 23, 2004 0:16:10 GMT -5
Investing terms like "dawn raid," "poison pill," and "shark repellent" might be reminiscent of old James Bond movies, but there's nothing fictional about them. Owning stock in a company means you are part owner, and with mergers and acquisitions occurring every week, it is important to know what these terms mean for your holdings.
Mergers, acquisitions, and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies often face decisions concerning these things. The job of management is to maximize shareholder value. In most cases, by using mergers and acquisitions, a company can develop a competitive advantage and ultimately increase shareholder value.
There are several ways that two or more companies can combine their efforts. They can partner on a project, mutually agree to join forces and merge, or one company can outright acquire another company. Here are some of the various intriguing ways that takeovers can take place:
Hostile Takeover -
This is a takeover attempt that is strongly resisted by the target firm. These types of takeovers are usually bad news since the employee morale of the target firm can quickly turn to animosity against the acquiring firm. There is usually a reason why the acquirer had to resort to a hostile takeover rather than a friendly one.
Dawn Raid -
Here a firm or investor buys a substantial amount of shares in a company first thing in the morning when the stock markets open. Usually a brokerage does the buying on behalf of the acquirer (the "predator") to avoid drawing attention to the buying. It builds up a substantial stake in its target (the "victim") at the current stock market price. Because this is done early in the morning, the target firm usually doesn't get informed about this until it is too late, when the acquirer has already scooped up controlling interest.
Saturday Night Special -
This is a sudden attempt of one company to take over another by making a public tender offer. The name comes from the fact that this practice used to be done over the weekends.
Takeovers are announced practically everyday,
but announcing them doesn't necessarily mean everything will go ahead as planned. In many cases the target company does not want to be taken over. What does this mean for investors? Everything! There are many strategies that management can use during M&A activity, and almost all of these strategies aim at affecting the value of stock in some way. Let's take a look at some more popular ways that companies can protect themselves from an unruly predator. These are all types of what is referred to as "shark repellent":
Golden Parachute -
This measure discouraging an unwanted takeover offers lucrative benefits to top executives, who lose their job once their company is taken over by another firm. Benefits include items such as stock options, bonuses, severance pay, etc. Golden parachutes can be worth millions of dollars and can cost the firm a lot of money.
Greenmail -
A spin-off of the term blackmail, greenmail occurs when a large block of stock is held by an unfriendly company, who then forces the target company to repurchase the stock at a substantial premium to prevent the takeover.
Macaroni Defense -
This is a defensive strategy by which the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a high price if the company is taken over. Why is it called Macaroni Defense? Because if a company is in danger, the redemption price of the bonds expands, kind of like Macaroni in a pot! This is a highly useful tactic, but the target company must be careful it doesn't issue so much debt that it cannot make interest payments.
People Pill -
Here, management threatens that in the event of a takeover, the entire management team will resign. This is especially useful if they are a good management team; losing them could seriously harm the company.
Poison Pill -
With this strategy, the target company aims at making its own stock less attractive to the acquirer. There are two types of poison pills. The first is the "flip-in," which allows existing shareholders (except the acquirer) to buy more shares at a discount. The second is the "flip-over," which allows stockholders to buy the acquirer's shares at a discounted price after the merger. If investors fail to take part in the poison pill by purchasing stock at the discounted price, the outstanding shares will not be diluted enough to ward off a takeover.
Sandbag -
Here, the target company stalls in the hope that another more favorable company will try to take them over. If management sandbags too long, they may not be spending much effort trying to run the company.
Next time you read a news release that mentions your company is using a poison pill to defend itself, you now know what it means. More importantly you'll also know that you have the opportunity to purchase more shares at a cheap price. Being a smart investor doesn't just mean knowing where and when to invest. It requires a full understanding of what it means to own a part of a company, and what decisions the company faces.