Hopefully, you enjoyed our previous blog and learning the crazy terminology used in the M&A world. In continuation of our previous blog, we’re going to discuss more colorful vocabulary used for target company defense strategies. Another defense tactic that target companies can use to deter an unfriendly takeover is referred to as leveraged recapitalization. The following terms are strategies of leveraged recapitalization.
A people pill is used when management of the target company threatens to resign simultaneously at the time of a takeover. Since losing an extremely good management team can cause serious harm to a company, this is a useful tactic. However, after takeover, management is usually fired. The effectiveness of a people pill defense depends on the type of situation.
With this strategy the target company tries to make the stock less attractive to the acquiring company. There are two types of poison pills, a flip-in and a flip-over. A flip-in poison pill allows the existing shareholder of the target company to buy more shares at a discounted price per share. This is usually written into the company’s shareholder-rights plan. The target company’s goal is to decrease the shares held by the acquirer and make the takeover bid more expensive and difficult. A flip-over poison pill, in the event of a merger, allows stockholders to purchase the acquirer’s shares at a discounted price. A more intense poison pill is called the suicide pill, where the target company takes an action that leads to the company’s ultimate demise.
When the target company stalls hoping that another, more favorable company will make a takeover attempt, it’s called a sandbag. However, management can sandbag for too long and get distracted from their management responsibilities in the organization.
A white knight is considered a good guy and is a company that comes in and makes a friendly takeover offer to the company that is facing the unfriendly takeover. The target company is offered a way out of the hostile takeover attempt with a friendly takeover.
Now when you read news releases using this type of terminology, you’ll have a better understanding of what is occurring. If you’re a shareholder in a company and you read about someone using a poison pill to deter a takeover attempt, you’ll know that you have the opportunity to buy more stock at a lower price. You now have a better understanding of the colorful words used in M&A.
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