While U.S. courts generally encourage invoking pre-takeover defenses, post-takeover defenses are very closely scrutinized and often disallowed from the legal standpoint.

If pre-takeover defense strategies fail to stop the approving vote, there are still a few tools available to target companies after the fact. However, since these have been historically subjected to much closer scrutiny, and are usually applied in isolation, post-takeover defenses have also been found, more often than not, to be ineffective. Consequently, post-takeover defenses work the best when used together with pre-takeover defenses.

“Just Say No”

Simply, when confronted with a hostile takeover, a target company can fire from all available pre-takeover “guns” and refuse the offer. If a bear hug is attempted, whereby an acquirer bypasses a target company’s CEO and goes directly to its board of directors, or if a two-tiered tender offer is proposed, the target company’s executive would be wise to lobby the board against any such offers. For this strategy to succeed, the key words should be "in the shareholders' best interests."

Filing a Lawsuit

One of the options available to target companies is to file a lawsuit and allege violations of securities and/or antitrust legislation. However, unless there are serious grounds/evidence indicating such violations, litigation rarely succeeds in preventing a takeover. On the plus side, lawsuits buy time needed to develop a plan B, although, truth be told, more often than not, there is no plan B. Lawsuits alleging securities violations are usually taken care of with additional disclosures. And, as for lawsuits alleging violations of antitrust laws, these typically work better if initiated by antitrust regulators, rather than by target companies.

Greenmail

Greenmail involves a target company buying back its own shares from the acquirer, but typically above the stock’s market price. Sometimes this repurchase can be quite costly, but at least there is an agreement that the acquirer would not go for another takeover offer. Note that greenmail was very popular during the fourth wave of the M&A activity during the 1980s. However, an amendment to the U.S. Internal Revenue Code effectively put a stop to it when acquirers were slapped with a 50% tax on greenmail profits.

Buying Back Its Own Shares

Instead of negotiating a greenmail deal, target companies could address other shareholders and start buying back their own shares not held by an acquirer. For instance, a target company could announce a cash tender offer of its own outstanding shares, the consequence of which could potentially increase the target's stock market price and/or force the acquirer to increase its own bid.

Another option is to effect a leveraged buyout, whereby a target company obtains debt funding from a private equity firm, buys out all of its shares, and effects a going private transaction. As long as the target's shareholders are provided with share value above an acquirer’s offer, the latter's takeover has poor chances of succeeding.

Selling the “Crown Jewel”

In certain instances, a target company may employ a tactic that can be summarized as, “if I can’t have it, no one can.” In other words, in an effort to avert a hostile takeover bid, the target company could sell one or more of its highly successful subsidiaries that is/are considered its crown jewel(s) and that is/are likely the reason for the takeover to begin with. Without the crown jewel(s) in the “crown,” an acquirer may very well withdraw its offer. However, courts are also quite likely to deem this strategy illegal and disallow the sale and/or hold the target company legally accountable.

“Pac-Man” Defense Strategy

When confronted with a hostile takeover bid, a target company could issue its own hostile bid to the acquirer. However, this strategy is rarely used because target companies usually neither have the resources nor shareholders' support to invoke the Pac-Man defense. In addition, if and when a counteroffer is made, the target company effectively cuts itself off of other defense strategies, such a taking the acquirer to court on securities or antitrust laws violations.

White Knight and White Squire Techniques

Employing a white knight defense is often the best solution available to target companies. It involves finding a third party, a white knight, that a target company can partner with and which is considered a good strategic fit with the target. Finding such a white knight can result in justifying higher market capitalization of the target and making it more difficult/expensive for an acquirer to go through with the bid.

Finally, a white squire defense involves finding a friendly and strategically suitable third party to buy a considerable minority holding in the target company that could be sufficient to block a hostile takeover without selling any of the crown jewels, selling of the entire company, or making any foolish counter bids.

This is the last article in the Mergers and Acquisitions series.

Source: Mergers and Acquisitions, by Rosita P. Change and Keith M. Moore, CFA Institute, 2007.