326 Part 3: Strategic Actions: Strategy Implementation
In general, activist pension funds (as institutional investors and as an internal gover-
nance mechanism) are reactive in nature, taking actions when they conclude that a firm
is underperforming. In contrast, activist hedge funds (as part of the market for corpo-
rate control) are proactive, “identifying a firm whose performance could be improved
and then investing in it.”^105 An example is found in the Opening Case with Trian Fund
Management, L.P., headed by CEO Nelson Peltz, seeking to change the strategy at DuPont
by replacing four board members favorable to Peltz’s activist hedge fund. However, the
activist fund, Trian, lost the shareholder vote to replace the directors, and DuPont was
not forced to breakup into several separate businesses.^106 Interestingly, given the need to
search for new opportunities, hedge funds have been pursuing more technology firm
deals. In fact, in 2014, 20 percent of such investments were in the technology sector, the
highest percentage for any sector. Hedge funds have traditionally avoided technology
firms because they change rapidly, and, as such, their future success is difficult to fore-
cast. Overall, activists have been winning more board seats, forcing mergers and divesti-
tures, and winning stock buyback programs, such as the stock buyback program at Apple
fostered by Carl Icahn.^107
However, another possibility is suggested by research results—namely, that as a
governance mechanism, investors sometimes use the market for corporate control to
take an ownership position in firms that are performing well.^108 A study of active cor-
porate raiders in the 1980s showed that takeover attempts often were focused on above-
average performance firms in an industry.^109 This work and other recent research
suggest that the market for corporate control is an imperfect governance mechanism.^110
Actually, mergers and acquisitions are highly complex strategic actions with many pur-
poses and potential outcomes. As discussed in Chapter 7, some are successful and many
are not—even when they have potential to do well—because implementation challenges
when integrating two diverse firms can limit their ability to realize their potential.^111
In summary, the market for corporate control is a blunt instrument for corporate
governance; nonetheless, this governance mechanism does have the potential to rep-
resent shareholders’ best interests. Accordingly, top-level managers want to lead their
firms in ways that make disciplining by activists outside the company unnecessary and/or
inappropriate.
There are a number of defense tactics top-level managers can use to fend off a take-
over attempt. Managers leading a target firm that is performing well are almost certain
to try to thwart the takeover attempt. Even in instances when the target firm is under-
performing its peers, managers might use defense tactics to protect their own interests.
In general, managers’ use of defense tactics is considered to be self-serving in nature.10-4a Managerial Defense Tactics
In the majority of cases, hostile takeovers are the principal means by which the market for
corporate control is activated. A hostile takeover is an acquisition of a target company by
an acquiring firm that is accomplished “not by coming to an agreement with the target
company’s management but by going directly to the company’s shareholders or fighting
to replace management in order to get the acquisition approved.”^112
Firms targeted for a hostile takeover may use multiple defense tactics to fend off the
takeover attempt. Increased use of the market for corporate control has enhanced the
sophistication and variety of managerial defense tactics that are used in takeovers.
Because the market for corporate control tends to increase risk for managers, man-
agerial pay may be augmented indirectly through golden parachutes (where a CEO can
receive up to three years’ salary if his or her firm is taken over). Golden parachutes,
similar to most other defense tactics, are controversial. Another takeover defense strat-
egy is traditionally known as a “poison pill.” This strategy usually allows shareholders