Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionVIII. Topics in Corporate
Finance- Mergers and
Acquisitions
© The McGraw−Hill^887
Companies, 2002Other Devices and Jargon of Corporate Takeovers
As corporate takeovers have become more common, a new vocabulary has developed.
The terms are colorful, and, in no particular order, some of them are listed here:
1.Golden parachute.Some target firms provide compensation to top-level
management if a takeover occurs. For example, shareholders in communications
provider Sprint cheered when the firm agreed to be acquired by then high-flying
MCI WorldCom in 1999. As is very common, the chairman of Sprint, William
Esrey had a golden parachute agreement. What came as a bit of a surprise was the
size. Depending on who did the calculations, the value of Esrey’s parachute was
about $500 to $700 million! The opposite of a golden parachute is a “golden
handcuff,” which is an incentive package designed to get executives to stay on
board once the acquisition is completed.
Depending on your perspective and the amounts involved, golden parachutes
can be viewed as a payment to management to make it less concerned for its own
welfare and more interested in stockholders when considering a takeover bid.
2.Poison put.A poison put is a variation on the poison pill we described earlier. A
poison put forces the firm to buy securities back at some set price.
3.Crown jewel.Firms often sell or threaten to sell major assets—crown jewels—
when faced with a takeover threat. This is sometimes referred to as the “scorched
earth” strategy. This tactic often involves a lockup, which we discuss shortly.
4.White knight.A firm facing an unfriendly merger offer might arrange to be acquired
by a different, friendly firm. The firm is thereby rescued by a white knight.
Alternatively, the firm may arrange for a friendly entity to acquire a large block of
stock. So-called white squires or big brothers are individuals, firms, or even mutual
funds involved in friendly transactions of these types. Sometimes white knights or
others are granted exceptional terms or otherwise compensated. Inevitably it seems,
this has been called whitemail.
5.Lockup.A lockup is an option granted to a friendly suitor (a white knight, perhaps)
giving them the right to purchase stock or some of the assets (the crown jewels,
possibly) of a target firm at a fixed price in the event of an unfriendly takeover.
6.Shark repellent.A shark repellent is any tactic (a poison pill, for example) designed
to discourage unwanted merger offers.
7.Bear hug.A bear hug is an unfriendly takeover offer designed to be so attractive
that the target firm’s management has little choice but to accept it. In August of
2001, two big “bear hug” offers attracted widespread interest. EchoStar
Communications (operator of the DISH network) made an unsolicited bid for
Hughes Electronics (operator of DirectTV). At about the same time, cable company
Comcast Corporation made a surprise $40 billion bid for AT&T’s cable unit.
CONCEPT QUESTIONS
25.7a What can a firm do to make a takeover less likely?
25.7bWhat is a share rights plan? Explain how the rights work.CHAPTER 25 Mergers and Acquisitions 863