18.4 Price-increasing Defences 50718.4 Price-increasing Defences
Firms have increasingly adopted takeover defences designed to make refinancing
more expensive and generally to increase share price. As a rule, such takeover de-
fences are legally unproblematic.
Pre-bid refinancing steps. The potential target company can simply take, in ad-
vance, the same refinancing steps that the acquirer would take following the suc-
cessful completion of the acquisition. This involves making the firm leaner, focus-
ing on core businesses, divesting other than core assets, increasing the firm’s debt-
to-equity ratio, and distributing distributable funds to shareholders by means of
dividend payments, share buy-backs, or withdrawal of shares otherwise. If the
company already is loaded with debt and has little distributable assets, it does not
look like a promising LBO target.
Refinancing can be made more expensive by corporate decisions that can typi-
cally be taken at board level. Some transactions must be authorised by the general
meeting (for important transactions, see Volume I; for distributions, see section
10.2.2; for frustration of the bid, see section 17.2).
However, the sale of assets that can be divested in the short term can increase
the costs of the firm in the long term and prove fatal in the worst case (see the
Stora Enso case, Volume I).
Higher share price, restructuring. Whereas a low share price can attract bid-
ders, a high share price can keep them away – provided that the company already
is lean. If the company has a conglomerate structure, its share price might not re-
flect fully the value of its various businesses. This can provide an opportunity for
an acquirer to make a profit after the acquisition by breaking the target up and
selling the pieces for more than it paid for the entire company. In order to avoid
the conglomerate discount, a company can make its business more transparent by
focusing on its core business and divesting the rest (for exit, see section 10.5).
When Mittal Steel made an offer for Arcelor, Arcelor used a mix of takeover defences de-
signed to increase share price and to make refinancing more expensive for Mittal Steel: Ar-
celor raised new debt; increased dividend payments; and decided to distribute further assets
to shareholders (section 18.11). Other takeover defences included an asset lock-up (for Do-
fasco shares, see below) and turning to a white knight (Severstal).
When InBev, a large Belgium-based brewer, made an unsolicited bid for Anheuser-
Busch, a large American brewer, Anheuser’s board: rejected InBev’s bid in July 2008 call-
ing it “financially inadequate” and not in the best interests of its shareholders; introduced a
cost reduction program that included the firing of 1300 employees; and raised its share
buybacks.
Sell-out provisions in the articles of association. The sell-out rights of other
shareholders can increase the amount of shares that the acquirer must buy and in-
crease the price that the acquirer must pay.
Particular sell-out provisions in the articles of association can be useful even
though the duty to make a mandatory bid, squeeze-out rights, and sell-out rights
have partly been regulated by the Directive on takeover bids. This is because the
provisions of the Directive are subject to many exemptions.