The word “takeover” is used as a generic term to refer to any acquisition through a tender offer. In layman’s language it is a straightforward transaction in which two firms decide to combine their assets either in a friendly or unfriendly manner under established legal procedures.
A “friendly takeover” is sometimes referred to as a merger or synergistic takeover; it occurs when an acquiring firm referred to as bidder o r raider and target firm agree to combine their businesses to realize the benefits. Synergistic gains can accrue to the corporation from consolidation of research and development labs or of market networks. Merger proposals require the approval of the managers (board of directors) of the target corporation.
“Hostile takeovers” are also called disciplinary takeovers in the literature. The purpose of such takeovers seems to be to correct the non-value-maximizing practices of managers of the target corporations. Takeover proposals do not need the approval of the managers of the target corporation. In fact, they are made directly to the shareholders of the target.
A “tender offer” is an offer by bidder or raider directly to shareholders to buy some or all of their shares for a specified price during a specified time. Unlike merger proposals, any tender offers for takeovers are made and successfully executed over the expressed objections of the target management.
Prior to 1960s, the so-called “intra-firm tender offer” was used exclusively to acquire shares in the issuer’s repurchase program. The separation of ownership and control in large corporations led to the development of the “inter-firm tender offer” as an important vehicle and became a popular mechanism for transfer of ownership.
An “any-or-all-tender offer” is where the bidder or raider will buy any tendered shares of the target corporation as long as the conditions of minimum number of tendered shares are met to insure majority control after the offer.
In a “conditional tender offer” the raider specifies a maximum number of shares to be purchased in addition to the minimum required. If the bid is oversubscribed, the tendered share becomes subject to pro-rationing. This t ender offer is further subdivided into two-tier negotiated, non-negotiated, and partial tender offers.
A “two-tier tender offer” is a takeover offer that provides a cash and non-cash price in two steps. In the first step, there is a cash price offer for sufficient shares to obtain control of the corporation, then in the second step, a lower non-cash (securities) price is offered for the remaining shares.
A “pure partial tender offer” is defined as on e in which there is no announced second-tier offer during the tender offer and no clean-up merger or tender offer closely following the execution of the tender offer. Partial offers are commonly used for less than 50 percent control of ownership in the corporation.
In a “negotiated two-tier tender offer” the bidder or raider, at the time of the first-tier offer agrees with target management on the terms of the subsequent merger. By contrast, in a “non-negotiated two-tier tender offer” no terms are agreed to at the time of the original offer for control of corporation. This lies between the pure partial offer and non-negotiated two-tier tender offer.
The “raider or bidder” is the person(s) or corporation who identifies the potential target and attempts to take over. “Target” is the potential corporation at which the takeover attempt is directed.
If the number of shares tendered in a takeover bid are more than required by their conditional offer (i.e. if the bid is oversubscribed) then the raider will buy the same proportion of shares from everyone who tendered; this is known as “prorationing.”
The “dilution factor” is the extent to which the value of minority shareholders is diluted after the takeover of a corporation. It is prohibited by the Securities and Exchange Commission. But it is argued that it is necessary to create a divergence between the value of the target corporation to its shareholders and the value to the raider or the bidder to overcome the free-rider problem.
The “crown jewel” is the most valued asset held by an acquisition target, and divestiture of this asset is frequently a sufficient defense to discourage takeover of the corporation.
A “fair price-amendment” requires supermajority approval of non-uniform, or two-tier, tender offers. Takeover bids not approved by the board of directors can be avoided by a uniform bid for less than all outstanding shares (if the bid is oversubscribed, it is subjected to prorationing).
“Golden parachutes” are provisions in the employment contracts of top-level executives that provide for severance pay or other compensation should they lose their job as a result of a hostile takeover.
“Greenmail” is the premium paid by a targeted company to a raider or bidder in exchange for his acquired shares of the targeted company.
“Leveraged buyout” is the purchase of publicly owned company stock by the incumbent management with a portion of the purchase price financed by outside investors. The company is delisted and public trading in the stock ceases.
A “lockup defense” gives a friendly party (i.e. white knight) the right to purchase assets of the corporation, in particular the crown jewel, thus discouraging a takeover attempt by the raider.
The term “maiden” is sometimes used to refer to the company at which the takeover is directed by the raider or bidder (i.e. target).
A “poison pill” is used as a takeover defense by the incumbent management; it gives stockholders other than those involved in a hostile takeover the right to purchase securities at a very favorable price in the event of a takeover bid.
A “proxy contest” involves the solicitation of stockholder votes generally for the purpose of electing a slate of directors in competition with the current directors to change the composition.
“Shark repellant” is an anti-takeover corporate charter amendment such as staggered terms for directors, supermajority requirement for approving merger, or mandate that bidders pay the same price for all shares in a buyout. A ” standstill agreement” is a contract in which a raider or corporation agrees to limit its holdings in the target corporation and not make a takeover attempt.
A successful raider who, once the target is acquired, sells off some of the assets of the target company to destroy its original entity, is known as a “stripper.”
A “targeted repurchase” is a repurchase of common stock from an individual holder or a tender repurchase that excludes an individual holder. The former is the most frequent form of greenmail, while the latter is a common defensive tactic against takeover.
A “white knight” is a merger partner solicited by management of a target corporation who offers an alternative merger plan to that offered by the raider which protects the target company from the takeover.
A “kick in the pants” is new information that induces the incumbent management to implement a higher-valued strategy on its own.
“Sitting on the gold mine” is where the dissemination of the new information prompts the market to revalue previously “undervalued” target shares.
In a “management buyout” a management team within a corporation or division purchases that corporation from its current owners, thus becoming owner managers. It is prevalent in both the private and public sectors and is one means by which privatization may take place.
