Poison PillA strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills-

1. Flip-in

2. Flip-over

Flip-in• A ‘’flip-in’’ allows existing shareholders (except the

acquirer) to buy more shares in the target company at a discount, upon the mere accumulation of a specified percentage of stock by a potential acquirer. By purchasing the shares cheaply, investors get instant profits and, more importantly dilute the shares held by the competitors. As a result, the competitor’s takeover attempt is made more difficult and expensive.

• Internet major Yahoo! adopted this form of poison pill in 2000 allowing the board to issue upto 10 million shares on new stock in the event of an acquisition offer on the table that they did not want to endorse (like that of Microsoft) and each share cane have nearly unlimited voting power. This defense made it practically impossible for Microsoft to proceed with a hostile bid after Yahoo! expressed its unwillingness towards Microsoft’s offer for Yahoo! and ultimately resulted in the withdrawal of the same.

Flip-OverA ‘’flip-over’’ allows stockholders to buy the acquirer’s shares at a discounted price after the merger. The holders of common stock of a company receive one right for each share held, bearing a set expiration date and no voting power. In the event of an unwelcome bid, the rights begin trading separately from the shares. If the bid is successful, all shareholders except the acquirer can exercise the right to purchase shares of the merged entity at discount. For instance, the shareholders have the right to purchase stock of the acquirer on a 2-for-1 basis in any subsequent merger. The significant dilution in the shareholdings of the acquirer makes the takeover expensive and sometimes frustrates it. If the takeover bid is abandoned, the company might redeem the rights.

Benefits

The obvious benefit of a poison pill is that it offers the target company enviable options even in the critical situation of a coercive takeover: a) The first option, allows the target to successfully ward off an unwelcome bid.b) As for the second option, in case the target company is considering going ahead with the deal, it makes the raider negotiate and buys time for the target company to get a proper evaluation of the offer and thereby maximizes the takeover premium, in the best interest of the shareholders of the target company.

Limitationsa) Ignores merits of takeover Firstly, these defenses tend to block all hostile takeovers without weighing out its merits. An unsolicited bid may sometimes cause the stock prices to shoot up and may have vast potential to increase shareholder wealth. Also, it may offer an attractive takeover premium which the shareholders might be interested in. A case in point is the Microsoft’s offer of a 62 percent premium to acquire internet giant, Yahoo! in February 2008 which was turned down by the Yahoo! Board and the Board’s decision was met with heavy criticism for having acted irresponsibly, followed by a spate of lawsuits alleging undermining of shareholder interests and a shareholder revolt led by billionaire investors like Carl Icahn.

b) Shield to Inefficient managementSecondly, as was seen in Japan and U.S.A., poison pills tend to shield managers of dismally performing companies from the pressures of the stock market as well as from the ‘threat’ posed to its incumbent management by a better offer. Sometimes, such threat of takeovers by ‘outsiders’ is primarily in the best interest of the shareholders but is against the vested interest of the management of the target company which failed to maximize shareholder wealth. This in turn denies the shareholders the opportunity to accept a welcome offer.

c) Step to improve company image:

Thirdly, with corporate governance becoming the order of the day, companies have poison pills in order to enhance their corporate governance ratings. The more transparent and shareholder friendly the company practices, the better the company image and hence bigger the size of the company.

d) Blocking Foreign Investment: Fourthly, in an era of economic liberalization, economic growth is but a function of foreign investment. Thus adoption of extreme defense measures by domestic companies creates the impression of a closed marked, thereby waning foreign interest in that country. This is in itself is reason enough for companies such as e-Access thriving in developing nations to scrap their poison pills and be open to takeover offers.

Example

• The world's second- largest soft-drink maker, Pepsi Co has sued its bottler, the Pepsi Bottling Group (PBG), the world's largest manufacturer, seller and distributor of Pepsi-Cola beverages for its poison pill defense against the soft drink makers' proposed acquisition.

• Pepsi filed a lawsuit in Delaware yesterday against PGB and certain board members for intentionally holding a board meeting without giving notice to all the directors of the PGB board and adopted a "poison pill," implemented certain new executive compensation packages and purported to amend the PBG bylaws in ways Pepsi believes are detrimental to its rights as a shareholder.

• Since Pepsi is a majority shareholder in PGB by virtue of it's 33.1-per cent stockholding, it has two directors on the board of PGB. Both these directors were not informed about the board meeting called by PGB last week.

• In the suit, Pepsi alleges, ''PBG and its board breached their fiduciary duties to PBG shareholders by adopting a shareholder rights plan, commonly referred to as a "poison pill," because it restricts Pepsi's rights as a PBG shareholder and constitutes an unreasonable and disproportionate response to Pepsi's constructive proposal.''

• The suit seeks declaratory and injunctive relief.

Pac-Man

• The Pac-Man defense is a defensive option to stave off a hostile takeover in which a company that is threatened with a hostile takeover "turns the tables" by attempting to acquire its would-be buyer.

• A major example in U.S. corporate history is the attempted hostile takeover of Martin Marietta by Bendix Corporation in 1982. In response, Martin Marietta started buying Bendix stock with the aim of assuming control over the company. The incident was labeled a "Pac-Man defense" in retrospect.

How do companies use Pac-man defense

To employ the Pac-Man defense, a company will scare off another company that had tried to acquire it by purchasing large amounts of the acquiring company's stock. By doing so, the defending company signals to the acquiring company that it is resistant to a takeover and will use the majority, if not all, of its assets to prevent the acquisition. The resisting company may even sell off non-vital assets to procure enough assets to buy out the acquirer. Often, the acquiring company sees the potential risk of being taken over as motivation to halt pursuit.

 

• The name refers to the star of a video game Pac-Man, in which the hero is at first chased around a maze by 4 ghosts - Inky, Blinky, Clyde and Pinky. However, after eating a "Power Pellet", he is able to chase and devour said ghosts. The term (though not the technique) was coined by buyout guru Bruce Wasserstein.

Laws

• In 1984, Securities Exchange Commission commissioners said that the Pac-Man defense was cause for “serious concern,” but balked at endorsing any federal prohibition against the tactic. The commissioners acknowledged a Pac-Man defense can benefit shareholders under certain circumstances, but emphasized that management, in resorting to this tactic, must bear the burden of proving it isn’t acting solely out of its desire to stay in office. One concern is that the money spent to gain control of the intruding company, which includes payment for the services of lawyers and other professionals needed to mount that defense, represents substantial funds that could have otherwise been used to improve the company’s business or increase its profits.

Greenmail

• Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover.

• The term is a derived from blackmail and greenback as commentators and journalists saw the practice of said corporate raiders as attempts by well-financed individuals to blackmail a company into handing over money by using the threat of a takeover.

Tactic• To generate large amounts of money by hostile takeovers of large, often

undervalued or inefficient (i.e. non-profit-maximizing) companies, by either asset stripping and/or replacing management and employees. However, once having secured a large share of a target company, instead of completing the hostile takeover, the greenmailer offers to end the threat to the victim company by selling his share back to it, but at a substantial premium to the fair market stock price.

• From the viewpoint of the target, the ransom payment may be referred to as a goodbye kiss. The origin of the term as a business metaphor is unclear, although it will certainly be understood in context as kissing the greenmailer and, certainly, millions of dollars goodbye. A company which agrees to buy back the bidder's stockholding in the target avoids being taken over. In return, the bidder agrees to abandon the takeover attempt and may sign a confidential agreement with the greenmailer who will agree not to resume the maneuver for a period of time.

• While benefiting the predator, the company and its shareholders lose money. Greenmail also perpetuates the company's existing management and employees, which would have most certainly seen their ranks reduced or eliminated had the hostile takeover successfully gone through.

Examples• Greenmail proved lucrative for investors such as T. Boone Pickens and Sir

James Goldsmith during the 1980s. In the latter example, Goldsmith made $90 million from the Goodyear Tire and Rubber Company in the 1980s in this manner. Occidental Petroleum paid greenmail to David Murdoch in 1984.

• The St. Regis Paper Company provides an example of greenmail. When an investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the paper concern, the company agreed to repurchase the shares at a premium. Goldsmith's group acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its stake at $52 per share, netting a profit of $51 million. Shortly after the payoff in March 1984, St. Regis became the target of publisher Rupert Murdoch. St Regis turned to Champion International and agreed to a $1.84 billion takeover. Murdoch tendered his 5.6% stake in St. Regis to the Champion offer for a profit. (Source: J. Fred Weston, Mark L.Mitchell J. Harold Mulherin -- Takeovers, Restructuring, and Corporate

Anti-Greenmail Provision

• A special clause located within a firm's corporate charter that acts as a deterrence against the board of directors passing a share buyback.

• This provision acts as a preventative measure, restraining managers from buying back company stock at significant premiums due to greenmail. A majority shareholder may be able to influence the board into purchasing shares at a significant premium, so the anti-greenmail provision requires that a majority of shareholders (excluding the majority shareholder) agree to the buyback.

Bear Hug• An offer made by one company to buy the shares of

another for a much higher per-share price than what that company is worth. A bear hug offer is usually made when there is doubt that the target company's management will be willing to sell.

• The name "bear hug" reflects the persuasiveness of the offering company's overly generous offer to the target company. By offering a price far in excess of the target company's current value, the offering party can usually obtain an agreement. The target company's management is essentially forced to accept such a generous offer because it is legally obligated to look out for the best interests of its shareholders.

Strategy

The basic strategy of the bear hug generally involves the attempted acquisition of a company that is currently not for sale. Investors take note of a company that is consistently performing well, and decide to take step to acquire that company. In many cases, an initial offer may have been rejected. This leads to the implementation of more aggressive methods that are designed to lead to the eventual acquisition of the company, whether the board of directors of the corporation like it or not.

Selling off Assets

Corporate raiders have long employed the strategy of the bear hug as a means of acquiring a company and then systematically dismantling the operation. By acquiring a company and selling off its assets, equipment, and property, the raider can often make an impressive profit from the venture

• While the bear hug is often successful, companies have managed to avoid this sort of situation. When it seems that a corporate raider is acquiring an inordinate amount of stock, steps can be taken to minimize the amount of influence that the raider may assert on the board and the other shareholders.

• In some countries, raiders have to file papers with the local government upon acquiring a certain percentage of available stocks. These papers outline the intent of the raider to acquire the company, and are made available to the current ownership.

• When steps are taken early in the process, it is possible to avoid a hostile takeover, and thus defuse the bear hug before it ever has a chance to damage the operations or reputation of the company.

Bear Hug Letters

• Bear hug letters are an art form. They are designed to put an unwilling takeover target on notice that they are no longer safe, but to fall short of being blatantly hostile.

• Microsoft’s bear-hug letter to Yahoo, made public along with Microsoft’s unsolicited $44.6 billion takeover bid, is no different. It contains all the nice-nice language you typically see in these letters (this is the hug) as well as a warning that there is a bear waiting to come out.

Examples

• Comcast has offered more than $40 billion in stock for AT&T's cable business.

• Satellite TV provider EchoStar dangled a $30 billion bid for Hughes Electronics, the owner of EchoStar rival DirecTV.

• And telecom company Alltel is wooing CenturyTel shareholders with a $9 billion deal.

SHARE EXCHANGE RATIOThe share exchange ratio is the number of shares that the acquiring firm is willing to issue for each share of the target firm.

The swap ratio also determines the control that each group of shareholders will have over the combined firm.

BASED ON EARNINGS PER SHARE (EPS)

Share Exchange Ratio = EPS of the target firm / EPS of the Acquiring firm

BASED ON MARKET PRICE (MP)

Share Exchange Ratio = MP of the target firm’s share / MP of the Acquiring firm’s share

BASED ON BOOK VALUE (BV)

Share Exchange Ratio = BV of share of the target firm / BV of share of the Acquiring firm

Bootstrap Financing

Bootstrap financing is to build a business out of little or nothing with no or minimal outside capital

Manage Cash flow wellYou'll improve your bootstrap financing dramatically if you keep your inflows high, and your outflows low. Constantly find ways to widen this gap. Cash flows is the lifeblood of your company. To do this, improve your accounts receivable by collecting quicker. If you have accounts payable on hand, delay it for as long as possible without penalty. Rid excess inventory. Most importantly again, manage expenses wisely by spending only on what fits your goal.

Advantages to Bootstrap Financing

Besides being one of the most inexpensive ways to raise capital for your business, bootstrap financing also looks good to outside lenders when the time comes to raise money through these routes. It also makes your business more valuable since no money was borrowed and no equity positions of the company had to be given up. Also there is no interest that must be paid since the money you get is generated from your own business and it's resources.

Types of Bootstrap Financing

• Factoring- Using your accounts receivable to generate cashflow by selling them to a "Factor," at a discount, in exchange for cash.

• Trade Credit- If your business can find a vedor or supplier to extend trade credit and allow you to order goods on net 30, 60, or 90 day terms, that is another form of bootstrap financing you could use. If your business is able to sell the goods before the payment is due, then you just generated cashflow without using any of your companies own cash.

• Customers-  Your business can use a letter of credit from your customer to purchase materials without using any company resources. Just like when a contractor has their customer pay up front and then uses that money to buy the materials they need to complete the job.

• Leasing- Free up cash by leasing equipment rather than purchasing outright.

HR Challenges

• Lack of Communication

Poor communication between people at all levels of the organization, and between the two organizations that are merging is one of the principal reasons why mergers fail. Not only a lack of communication a serious issue for merging organizations

• Lack of Direct involvement by Human resources:

The early stages of mergers and acquisitions are often carried out in secret and do not usually involve human resources in the discussions. The lack of involvement by human resource can have a detrimental impact on the merger, since it means that many issues that are directly linked to the success or failure of the merger will have been overlooked.

• Lack of Training:

Lack of training, not only of employees throughout the merging company, but also the senior managers and HR professionals who are supposed to oversee the merger process, is one of the main contributors of merger failure.

Therefore, senior managers are often reluctant to involve human resources professionals in the merger process because they do not believe that HR possess the skills required to contribute to the merger process.

• Loss of key people and Talented employees:

Mergers and acquisitions often lead to the loss of the merging companies greatest assets: talented employees and key decision-makers. Acc. to the American Management Association, one out of four top performers leaves the company within 3 months of the announcement of an event involving major change in the organization.

• Loss of Customers

With the loss of employees also comes the loss of customers during mergers and acquisitions. Some of the most talented employees, responsible for bringing in valuable business to their organizations, are often the ones who leave, resulting in the loss of key customers.

• Corporate Culture Clash

Even if two companies seem to have all the right ingredients in place for a successful merger, cultural differences can break the deal. It is not enough for two companies to appear to fit well on paper, at the end of the day, if the people are not able to work together, the merger will not succeed.

Example: Daimler Chrysler merger. Bother expressed their commitment in beginning to working together and sharing work practices and product development methods, this commitment did not materialize, , As Daimler management’s unwillingness to use Chrysler parts in cars.

• Power Politics:

Clashes between the management of the two companies, as well as clashes within a company’s own management, can lead to the demise of a merger.

• Role of HR in M&A• Human Resources professional should take

an active role in educating senior executives about HR issues that can interfere with the success of the merger and with meeting key business objectives.HR professionals can play an active role in the change process by offering interventions that will help ensure a successful merger

• Facilitates Transition Teams:Transition teams are used to study and recommend options for combining the two companies in a merger.To discourage decision-making based on personal agendas or politics, human resource professional that facilitate transition teams should work with team leaders to run effective meetings.

This gives all team members an opportunity to contribute their viewpoints

• Educate Managers & Employees:To minimize stress and uncertainty in the organization during the merger process, develop and deliver educational seminars to help employees and managers manage stress, low morale and productivity issues in work groups.These seminars should focus on specific issues affecting employees rather than on change management in general.

• Develop Newly Formed Teams:After implementation of merger as new teams are formed, they may experience problems arising due to interpersonal conflict, unclear roles and responsibilities, and confusing procedures.

• A process to develop newly formed teams, review this process with managers and supervisors and offer to help launch new teams by providing consultation should be created.

• Reinforce the New Culture:

When two companies with vastly different cultures merge, help the management to preserve the best aspects of the old company and carry them into the new company.Find out what cultural characteristics and values senior executives want to preserve from their respective companies, what they don't want to keep, and what new characteristics they want to introduce in the new organization.Make a list and ask each level of management for feedback.Provide management with a development tool.Survey all levels of management about three months after the merger, to assess progress towards the new culture, and provide feedback to managers.

• Involve in Planning, Transition & Integration Teams:HR professionals need to contribute specific expertise to these teams, enabling the merger to be managed as a project while keeping core business going.Develop effective ways of collaborating with the planning team from other company in pre-merger phase.Place framework in place for managing the different phases of the merger.

Find ways in which people from both the companies can get to know each other.Identify how emerging organization's vision can best be communicated.Take "best of both" rather than "equal shares" or "acquirer dominates" approach to decide the roles and working practices to be adopted.Decide fair principles on the handling of redundancies.

• Identify HR Issues & Carry Out an Effective HR Due Diligence:Comparing terms & conditions of employment and salary scales. Understanding the skills of present HR team - are they adequate to coordinate proposed changes to the business? Understanding the organizational structure.Identifying what is required in terms of manpower plan to achieve the business strategy.Identifying key personnel - to what extent is the necessary knowledge & skill vested in staff critical to running the business?Identifying which job descriptions need to be changed.Comparing ways of working and identifying differences which need to be addressed.Is the organization unionized or does the employee representation group have negotiations rights, and if so, what do these rights include?

• Carry Out Effective HR Integration:Carrying out effective HR integration on the following: -Remuneration Benefits Terms & Conditions Culture & Management Style Career & other Development Issues Communication Employee Relations

• Help Line Managers to Communicate Effectively During Transition Phase: Managers play key role in communication about merger. Need practical help in understanding how to communicate with employees. Recognizing that merger is an emotional issue for the employees.

Employees need to be communicated with and convinced of the benefits at an emotional and not just a rational level. Main challenge of line managers is "getting staff into confidence" - Raise the morale of the staff. Personalize the message given through corporate videos. Ability to develop two-way communication. HR can provide practical help with team briefings and feedback processes.

• Managing Individuals with Dignity:CEOs are keen to get through the difficult task of re-organization and job losses.Such speed in dealing with employees may compromise on fairness and dignity.Handling of key changes for individuals such as job changes, appointments, relocations and exits sets the tone for staff view the new organization.Handling redundancies inappropriately usually results in a memorable backlash among 'survivors'.

• Developing & Implementing Actions to Retain Key Employees: Key employees have to stay if both the organizations are to learn from each other's strengths. Line managers should identify key employees and involve them in merger process. If neglected in early stages, they can prove harmful for the smooth running of an organization. Organization should develop retention strategies. Financial incentives are not always necessary, letting people know that they are valued can be sufficient encouragement for them.

• Help Clarify Roles: People need help in clarifying their roles. Knowing where they fit in the organization.

May require them to learn new skills or adjust their working practices.Briefings & Training in necessary.