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What is a Shark Repellent?
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In this article, I will break down the meaning of Shark Repellent Defense so you know all there is to know about it!
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What Is A Shark Repellent Defense
In corporate finance, a shark repellent is a term used to refer to a defense strategy employed by companies that are the target of a hostile takeover bid.
The objective of the shark repellent defense strategy is to make the target company less attractive or the acquisition less profitable in such a way as to deter the acquirer from moving forward with the hostile takeover.
The term originates from the concept of “shark attacks” and “shark repellents”.
The idea is if a shark, being a predator, attacks you, you should use a shark repellent to defend yourself against the attack.
Shark repellent defense strategies are typically found in the company’s charter or bylaws and get triggered when a hostile takeover attempt is initiated.
In some situations, target companies that use a shark repellent tactic to fend off an unwanted hostile takeover attempt may be acting in the best interest of their shareholders.
However, there are instances where that may no longer be the case.
Keep reading as I will further break down the meaning of a shark repellent defense and tell you how it works.
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Shark Repellent Defense Strategies
The notion of “shark repellent” refers to different types of strategies that companies can use to defend themselves against a hostile takeover attempt.
The most common shark repellent strategies are golden parachutes, supermajority, poison pill, staggered board, Macaroni defense, and the scorched earth defense.
Let’s look at each of these defense strategies in more detail.
A golden parachute is a type of provision that is included in the target company’s executive contracts where the executives are given large cash or stock compensations in the event of a takeover.
This defense strategy is useful for the executive team who is likely to be fired and replaced following the takeover attempt.
The main idea here is to make the acquisition to become more expensive for the acquirer.
The supermajority requirement is an effective defense strategy that is found in the company’s bylaws where the acquirer will need to get more than 70% or 80% of the shareholder votes to approve the takeover.
This makes it much more difficult to acquire the required number of shares allowing the acquirer to get a sufficient number of votes to approve the takeover.
The idea of this strategy is to make the acquisition much more expensive and difficult for the acquirer.
The poison pill is another effective strategy that gets triggered when the acquiring entity purchases a certain percentage of shares in the company.
When the poison pill is triggered, the target company’s shareholders are given the right to buy more shares at an important discount.
This will result in a dilution of the acquirer’s percentage ownership in the target and makes it more expensive to achieve a controlling interest.
Typically, the poison pill gets triggered when the acquirer has purchased anywhere above 15% of the company’s voting stocks and below 40%.
Another technique used as shark repellent is for a company to adopt a staggered board of directors.
With a staggered board, you’ll have different board members that are elected for a different periods ranging from one year to four or five years.
The idea here is to make it difficult for an acquiring company to influence the board of directors or use its votes to quickly elect members that are favorable to the hostile takeover attempt.
The Macaroni defense is a defense strategy where the company issues bonds that are required to be redeemed in the future at a high price.
The idea is to create a future financial stress on the acquirer making the acquisition less attractive.
If the acquirer proceeds with the acquisition, it will have the obligation to redeem the issued bonds on time to avoid damaging its credit rating or having creditors pursue the company.
Scorched Earth Defense
The scorched earth defense is typically a type of defense strategy used as a last resort where the company sells or gets rid of its most valuable assets.
The idea is to make the company so unappealing that the acquirer will abandon its takeover attempt.
The target company’s board is walking on eggshells here as they are required to act in the best interest of shareholders as fiduciaries.
One can argue that destroying the company to defend against a hostile takeover attempt may cross the line.
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Shark Repellent Examples
Let’s look at a few examples of how shark repellents can be used to fight a hostile takeover attempt.
Let’s look at a scenario where a target company uses a poison pill to allow current shareholders to acquire voting shares at a discount.
For the poison pill to work, the target company must have certain provisions in its charter allowing it to issue shares to current shareholders at a discount, and exclude the hostile acquirer.
If the acquirer has purchased 20% of the company’s voting stocks and needs another 30%, with the poison pill being triggered, its stock position may get diluted to 10% making it more expensive to reach the 51% mark.
Another example of how shark repellents can be used is by deploying several defenses at the same time.
A company can provide its management team with a golden parachute, adopt a staggered board, and include a supermajority requirement for the shareholders to approve a hostile takeover.
This makes it much more difficult and more expensive for an acquiring company to take over the company.
With a staggered board, the acquirer will have a hard time influencing the board.
With the golden parachute, it will have to financially compensate the target company’s executives following the acquisition making the deal more expensive.
With a supermajority, the acquirer will need the approval of a high percentage of shareholders for the hostile takeover to be approved.
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So there you have it folks!
What is a shark repellent in mergers and acquisitions?
In a nutshell, shark repellent is a defense strategy companies use to deter another company from taking them over in a hostile manner.
Just like shark repellents help you defend against a shark attack, a “shark repellent” is a slang term used in business to refer to the defense used to defend against a hostile acquirer.
There are different strategies that can be used as shark repellents, such as the poison pill, staggered board, Macaroni defense, golden parachute, supermajority, and others.
For shark repellent defense strategies to work, the company must include different provisions in its charter or bylaws that get triggered in the event of a hostile takeover.
Now that you know what a shark repellent is in business, good luck with your research!
I hope you enjoyed this article on Shark Repellent! Be sure to check out more articles on my blog. Enjoy!
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