Leveraged recapitalization a takeover defense in

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Unformatted text preview: gotiation, a large block of stock at a premium from one or more shareholders to end a hostile takeover attempt by those shareholders. leveraged recapitalization A takeover defense in which the target firm pays a large debtfinanced cash dividend, increasing the firm’s financial leverage and thereby deterring the takeover attempt. golden parachutes Provisions in the employment contracts of key executives that provide them with sizable compensation if the firm is taken over; deters hostile takeovers to the extent that the cash outflows required are large enough to make the takeover unattractive. shark repellents Antitakeover amendments to a corporate charter that constrain the firm’s ability to transfer managerial control of the firm as a result of a merger. If the management of a target firm does not favor a merger or considers the price offered in a proposed merger too low, it is likely to take defensive actions to ward off the hostile takeover. Such actions are generally developed with the assistance of investment bankers and lawyers who help the firm develop and employ effective takeover defenses. There are obvious strategies, such as informing stockholders of the alleged damaging effects of a takeover, acquiring another company (discussed earlier in the chapter), or attempting to sue the acquiring firm on antitrust or other grounds. In addition, many other defenses exist (some with colorful names)—white knight, poison pills, greenmail, leveraged recapitalization, golden parachutes, and shark repellents. The white knight strategy involves the target firm finding a more suitable acquirer (the “white knight”) and prompting it to compete with the initial hostile acquirer to take over the firm. The basic premise of this strategy is that if being taken over is nearly certain, the target firm ought to attempt to be taken over by the firm that is deemed most acceptable to its management. Poison pills typically involve the creation of securities that give their holders certain rights that become effective when a takeover is attempted. The “pill” allows the shareholders to receive special voting rights or securities that make the firm less desirable to the hostile acquirer. Greenmail is a strategy by which the firm repurchases, through private negotiation, a large block of stock at a premium from one or more shareholders to end a hostile takeover attempt by those shareholders. Clearly, greenmail is a form of corporate blackmail by the holders of a large block of shares. Another defense against hostile takeover involves the use of a leveraged recapitalization, which is a strategy involving the payment of a large debtfinanced cash dividend. This strategy significantly increases the firm’s financial leverage, thereby deterring the takeover attempt. In addition, as a further deterrent, the recapitalization is often structured to increase the equity and control of the existing management. Golden parachutes are provisions in the employment contracts of key executives that provide them with sizable compensation if the firm is taken over. Golden parachutes...
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