Shark Repellent

Shark repellent refers to periodic or continuous strategies that target companies or public businesses take to ward off the acquirer in case of a hostile or unwanted takeover. It is undertaken when the management believes that the acquisition will not be sufficiently profitable.

This kind of strategy helps in keeping away acquirers successfully. Strong management successfully comes up with a solid strategy to control such situations, and many such cases have been recorded, which have proved successful.

Shark repellent is a process in which the target companies device strategies to drive away big companies which tend to acquire them. Thus, it is a method of driving away sharks in this field.

In the competitive world of acquisitions, takeovers, and mergers, companies try to protect the interests of the business and the shareholders by employing certain measures that guard the companies against bigger or aggressive players that intend at hostile takeovers.

Best shark repellent stems from the idea that a company’s actions seeking to take over other businesses are called shark attacks, and the company itself is called a predator. They are the defensive strategies or tactics that companies implement to deter the attacks. This type of shark repellent in business have repeatedly proved to be successful in warding off predators. Whenever such attempts are made, the target company devices a strategy that is able to stop the takeover. Strategies lie sandbag, golden parachute and poison pill have repeated come up in cases that have proved their worth as a successful method to stop takeover.

Businesses are in constant threat of hostile takeovers where one company, called the target, is acquired by another company, called the acquirer, without any mutual agreement. Hostile takeovers aim at replacing the target company’s management so that acquisition is approved. The best shark repellent strategies that are now popular have been the effects of historic takeovers and attempts to ward them off.

• Macaroni Defense: A tactic companies use by issuing a large number of bonds that must be redeemed at a higher price if the company faces a takeover such that the aggressor is cautioned. Take, for instance, a company AAA Ltd. that wants to take over the business of BBB Ltd. issues 100,000 bonds redeemable at 125% of the issued value in the event of a change of control. This situation can ward off AAA Ltd. from taking the deal further because of the higher premium it will have to pay to the bondholders.
• Staggered Board: In a staggered board strategy, the company makes elections to the board in such a way that at any given time, only a fraction of board members is elected, thus avoiding any possibility of change of control during the election to the board.
• Golden Parachute: A golden parachute is a shark repellent strategy where large compensation is guaranteed to the company's top management should they be dismissed due to takeover or merger; thus, helping as an anti-takeover strategy.
• Supermajority: As the name suggests, supermajority mandates the majority of shareholders to approve the takeover initiative. Thus, it becomes difficult for the takeover company to convince the many shareholders to satisfy the majority.
• Poison Pill: In a poison pill tactic, the target company dilutes the shareholding by issuing more shares at a discount, thus making the takeover bid a difficult process and rather expensive
• People Pill: A people pill strategy is a simple way of proactively warding off the predator. The management works it out by announcing that it will resign from the position in a change of control. This makes the acquirer skeptical of his decision because of the fear of losing an experienced and good management team.

Example #1

The case is related to Saxon Industries, when an American investor-owned more than a 9.9% stake in the corporation. Saxon Industries, fearing takeover attempts, paid the investor a high premium for buying back shares. When the Saxon stock was trading at $7.21 per share, Saxon paid the investor a premium as high as $10.50. This was a luring 45% premium pay, which the investor could not deny. Such a shark repellent strategy strategy is known as ‘greenmail.’

Example #2

Another example of shark repellent defense was Oracle v PeopleSoft Inc, which dates to June 2003. People Soft Inc, in an attempt to deter Oracle from taking it over, paid its customers a five-fold rebate on the license fee. The takeover bid was pegged at $7.7 billion.

Example #3

A classic real-world example of shark repellent defense is the White knight defense tactic. A leading electronics equipment maker, AMP, Inc., used this strategy against Allied Signal Corporation, which worked in the aerospace sector. Allied Signal Corp. made a $10 billion bid for taking over the AMP, Inc. As a defense, AMP, Inc executives offered a friendly bid to be made by another company that could potentially avoid a hostile takeover by Allied Signal Corporation. Tyco, Inc made this friendly bid. The deal was a stock-for-stock swap, which had a total consideration of $11.3 billion.

Here we discuss the advantages of most effective shark repellent.

• Using shark repellent in business fends off unwanted or hostile takeover attempts, in which case the predator finds the target less attractive because of the deployed tactics. This helps in halting the procedure and the target is saved from the takeover.
• Shark repellent strategies like a poison pill, supermajority, and scorched earth help form formidable defenses around the business such that the business, the management, and the shareholders are protected.

Even most effective shark repellent has some disadvantages.

• The unwise use of these tactics can backfire greatly. For instance, the macaroni defense protects the business by issuing bonds redeemable at a higher price. If the premium is high and the predator wards off, the company is entitled to fulfill the redemption obligation.
• Sometimes management uses defense tactics against takeovers that are not in the best interests of the shareholders. A management that has performed poorly but still wants to retain control of the board may deploy tactics that prohibit takeover, which can be fruitful for the business needs and shareholder interests. . This puts the interest of the stakeholders at stake and ultimately destroys the successful operation of the company. The investors lose faith in the business, resulting in its downfall.
• Every strategy, when employed, makes management count for costs. It is always a trade-off between the costs of deploying such strategies and accepting the fate of a hostile takeover. This is very important because cost is an important factor in the business operation. If it is seen that the takeover may result in cost reduction and growth, only then it is advisable to go for it.

This has been a guide to what is Shark Repellent. We explain its strategies, along with examples, advantages and disadvantages. You may learn more about financing from the following articles –

• Reverse Takeover
• Acquisition Premium (Takeover)
• Friendly Takeover
• Williams Act