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Day 123 in MIT Sloan Fellows Class 2023, M&A and PE 6 "Poison pill"

SFMBA MIT MBA finance M&A

Hostile take over 

Why We Need More Hostile Takeovers

 

In the 1980s, hostile takeovers were not a rare strategy, and many activists tried to take over inefficient companies. And then, they fired board members and cut down the majority of costs. 

Unocal and Picken case - tender offer from both sides

Pickens Launches $3.4 Billion Bid for Control of Unocal - The Washington Post

Maverick oilman T. Boone Pickens Jr. today launched a $3.4 billion offer to gain control of Unocal Corp., his fourth raid on a major oil company in the past three years, but one that analysts said probably will give him the most problems.

Pickens, chairman of Mesa Petroleum Co., said he hoped eventually to buy all of Unocal's stock, which would be worth about $9.7 billion.

The offer was not unexpected on Wall Street. A group of investors headed by Pickens already owns 13.6 percent of Unocal's stock, and Pickens has indicated he plans to make a run at the Los Angeles-based company, formerly known as Union Oil Co. of California.

In a brief statement, Unocal said its board would consider the offer sometime in the next two weeks. But Fred L. Hartley, the oil company's chairman and president, has in the past spoken derisively of Pickens' actions against other oil companies and vowed to give Pickens a tough battle if he made an attempt to take over Unocal.

Then, Unocal offered $72 tender against $54 offer from Pickens. 

Why did it give such an offer?

  1. Reduce shareholder's incentive: Shareholders think about a future tender offer from Unocal and cannot respond to a tender from Pickens.
  2. Reduce incentives of Pickens: If you buy your shares by yourself, you need to use tons of cash. It would weaken the attractiveness as a buying target.

PICKENS TO END BID FOR UNOCAL - The New York Times

 

Everytime those acquisition trials triggered a lawsuit and boards tended to win because plaintiffs have to show a smoking gun on breach of their duties. 

The discretion of board members is powerful if they can deliver a good equity story to shareholders and a hostile buyer needs to justify his strategy more strongly.

 

The court actually looks for

  1. That there is a genuine threat to the company. 
    1. Company should be independent
    2. shareholders can't make an informed decision
    3. They might jump at a bad deal for the wrong reasons
  2. That the defense adopted is not too extreme
    1. Shareholders aren't precluded from electing directors

 

Poison pill

In finance, a "poison pill" is a tactic used by a company to defend itself against a hostile takeover attempt by another company. The term refers to a defensive strategy that makes the company's stock less attractive or valuable to the acquiring company, thereby making the takeover more difficult or expensive to achieve.

One common type of poison pill is known as a "shareholder rights plan." This plan gives existing shareholders the right to purchase additional shares of stock at a discounted price, which dilutes the value of the acquiring company's stock and makes it more expensive to acquire a controlling interest in the target company. Other types of poison pills may include provisions that allow the target company to issue new shares of stock, take on significant debt, or sell off valuable assets in the event of a hostile takeover attempt.

While poison pills can be an effective defense strategy for companies, they are also controversial. Critics argue that poison pills can entrench management and prevent shareholders from receiving the best possible price for their shares in the event of a takeover. Supporters, on the other hand, argue that poison pills are a necessary defense against predatory or opportunistic takeover attempts that may not be in the best interests of the company or its shareholders.

A poison pill is an extremely strong tool to protect board members because it would dilute the value of shares adn there is shadow pill to be triggered after hostile buying. 

 

The only way to win a takeover battle from hostile buyer perspective is to replace the board.

 

 

Other cases of hostile deals

  • KKR vs RJR Nabisco
  • Revlon vs MacAndrews
  • Time vs Paramount

RJR Nabisco - Case - Faculty & Research - Harvard Business School