“Post-offer defense mechanism” is a term used to label a broad group of strategies that can be employed by the target company of a hostile takeover. Unlike pre-offer defense strategies that are more concerned with preventative steps, post-offer defenses are executed when there is a real threat of a hostile takeover.
The goals of the post-offer defense strategies are to delay a takeover in order to develop more efficient defensive mechanisms, make a target company less attractive to a bidder, or eliminate any acquisition possibility.
Types of Post-offer Defense Mechanisms
Types of post-offer defense mechanisms include:
1. Just say no defense
When the management of a target company opposes the takeover deal, the managers may convince the members of the company’s board of directors that the proposed deal will not be beneficial to the company’s shareholders.
When a target company receives an offer, it can start a litigation process against the acquirer. The success of the process depends on factors such as anti-competition laws in the jurisdiction or the presence of sufficient evidence. Even if the chances of success are low, the litigation process can still be employed to delay a potential hostile takeover. During this time, a target company may develop a more thorough defensive strategy.
3. Greenmail (Greenmailing)
Greenmail is a practice where, when the acquirer has already secured a substantial number of shares, the target company buys back shares at a significant premium.
4. Crown jewel defense
The main purpose of the crown jewel defense is to make the target company less attractive to a potential acquirer. Essentially, in this takeover defense strategy, a target company sells off its most valuable assets (its “crown jewels”) to a third party or spins off into an independent entity. The sale of assets is typically done assuming the target will buy the assets back after the takeover threat is gone.
5. Pac-Man defense
In the Pac-Man defense, also known as the flip-over defense, a target company seeks to flip the situation by attempting to purchase its potential acquirer. The Pac-Man defense is rarely used, as the nature of the strategy implies that both companies are of roughly equal size. A small target company likely cannot effectively use this strategy because it simply doesn’t have the funds to mount a serious takeover threat to the acquirer.
6. White knight defense
When a target company receives a takeover threat, it may invite a strategic partner, called a “white knight”, to purchase a controlling interest in the company. In other words, instead of a merger with the outside acquirer, the target company merges with its strategic partner.
Generally, the white knight defense is a mechanism of last resort to avoid a hostile takeover. However, it may create benefits to the shareholders of a target company through synergies between the target and its strategic partner, in the end creating a favorable merger.
7. White squire defense
The white squire defense is a variation of the white knight defense. In this strategy, a target company asks its strategic partner to obtain a sizeable minority interest in the target. Although the interest is not sufficient to control the company, it is adequate to fend off a corporate raider.