Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VIII. Topics in Corporate

Finance

25. Mergers and
    Acquisitions

© The McGraw−Hill^883

Companies, 2002

DEFENSIVE TACTICS

Target-firm managers frequently resist takeover attempts. Resistance usually starts with
press releases and mailings to shareholders that present management’s viewpoint. It can
eventually lead to legal action and solicitation of competing bids. Managerial action to
defeat a takeover attempt may make target-firm shareholders better off if it elicits a
higher offer premium from the bidding firm or another firm.
Of course, management resistance may simply reflect pursuit of self-interest at the
expense of shareholders. This is a controversial subject. At times, management resis-
tance has greatly increased the amount ultimately received by their shareholders. At
other times, management resistance appears to have defeated all takeover attempts to the
detriment of their shareholders.
In this section, we describe various defensive tactics that have been used by target
firms’ management to resist unfriendly attempts. The law surrounding these defenses is
not settled, and some of these maneuvers may ultimately be deemed illegal or otherwise
unsuitable.

The Corporate Charter

The corporate charterconsists of the articles of incorporation and corporate bylaws that
establish the governance rules of the firm. The corporate charter establishes the condi-
tions that allow for a takeover. Firms frequently amend corporate charters to make
acquisitions more difficult. For example, usually, two-thirds (67 percent) of the share-
holders of record must approve a merger. Firms can make it more difficult to be ac-
quired by changing this required percentage to 80 percent or so. Such a change is called
a supermajority amendment.
Another device is to stagger the election of the board members. This makes it more
difficult to elect a new board of directors quickly. We discussed staggered elections in
Chapter 8.

Repurchase and Standstill Agreements

Managers of target firms may attempt to negotiate standstill agreements.Standstill
agreements are contracts wherein the bidding firm agrees to limit its holdings in the tar-
get firm. These agreements usually lead to the end of a takeover attempt.
Standstill agreements often occur at the same time that a targeted repurchaseis
arranged. In a targeted repurchase, a firm buys a certain amount of its own stock from
an individual investor, usually at a substantial premium. These premiums can be thought
of as payments to potential bidders to eliminate unfriendly takeover attempts. Critics of
such payments view them as bribes and label them greenmail.
For example, on April 2, 1986, Ashland Oil, Inc., the nation’s largest independent oil
refiner, had 28 million shares outstanding. The company’s stock price the day before
had been $48 per share on the New York Stock Exchange. On April 2, Ashland’s board
of directors made two decisions:

1. The board approved management’s agreement with the Belzberg family of Canada
   to buy, for $51 a share, the Belzbergs’ 2.6 million shares in Ashland. This was a
   standstill agreement that ended a takeover skirmish in which the Belzberg family
   had offered $60 per share for all of the common stock of Ashland.


2. The board authorized the company to repurchase 7.5 million shares (27 percent of
   the outstanding shares) of its stock. Simultaneously, the board approved a proposal

CHAPTER 25 Mergers and Acquisitions 859

25.7

greenmail

In a targeted stock

repurchase, payments

made to potential

bidders to eliminate

unfriendly takeover

attempts.