To gauge whether a defense mechanism allows a target to reach its goals, we must first determine what is the company’s preferred outcome. Two options are commonly stated.
The first one is the price improvement theory under which a corporation may refuse an offer because it believes its true value is greater than the offer at hand. This higher valuation is said to be based on internal financial statements, information, or corporate strategy that the bidder does not have access to. It places them in a situation where accepting the offer would be detrimental to their shareholders. According to the price improvement theory (Schwert, 2000), the refusal of the offer either expresses the company’s desire to wait for another higher offer from a different bidder or serves as a basis for negotiating a higher price. If the discussions are successful, the higher price translates into a bigger premium for the targets’ shareholders, demonstrating an alignment of their interests with the management’s policies.
In that case, we have hypothesized that bidders are responsive to this sort of argument (the transaction might become far more expensive than anticipated if antitakeover defenses are used or activated) and are amenable to discussion.
Our first hypothesis is that defenses against hostile takeovers are particularly effective in case the target is using them as a leverage to negotiate a better price.
Another theory, this time based on a lack of or insufficient alignment between managers or the board and shareholders, could explain why targets would refuse an offer. Managers may dread being replaced, losing their position, or losing financial rewards. They may also be concerned about losing control of the company. These situations, which can lead to a bid being turned down, are called «managerial entrenchment» and they can lead to fewer bids in the future and a lower market value (Baron, 1983).
Regardless of the reasoning behind a straight-out rejection, another goal for a target when refusing a deal can be just that... a refusal with no hidden agenda.
In that case, when a company wishes to do away with a hostile takeover threat or bid, the methods employed are not going to be similar to those used when the goal is to negotiation a better price per share for the investors. Using poison pills (a tactic enabling the board of directors to issue additional shares that can then be bought by pre-existing shareholders at a discount) or selling crown jewel assets (which refers to the disposal of one or multiple of its strategic assets, activities or business lines) for instance will most likely not to result in a higher valuation of the target, on the contrary it would probably lower the company’s worth or at the very least affect its business.
In fact, when considering acquiring a firm and in order to measure the future financial benefits for the acquiror, a pro forma and standalone valuation models are calculated in order to quantify both the synergies that are expected by the buyer (for the pro forma model) and the equity value of the prospective target for the latter. And using the previously cited techniques result in a lower equity value in a pro forma (since the target deliberately tries to make itself less valuable to the bidder). Each share is then worth less for the bidder.
However, the appreciation of whether the target is still attractive or not is left to the discretion of the bidder.
Therefore, our hypothesis is that the effectiveness of defensive methods cannot be anticipated by targets and depends on the (sometimes hidden) motivations of the bidder.
Moreover, targets must face a set of constraints that are mostly beyond its control. It has time constraints with regard to the timetable of a hostile bid and deadlines that can be very short. For example, if the firm wants to use the white knight method (finding another acquiror on its own that seems to be a better fit), the target must first identify them, engage in negotiations, and reach a compromise despite the time limitations they may face.
The effectiveness of the methods is constrained by the reactivity of the company and its ability to anticipate the hostile takeover.
In order to investigate our hypotheses, we chose an empirical and deductive method based on case studies because it allows us to draw conclusion from contemporary, real-life instances, permitting the conclusions to be accurate and up to date. Therefore, we analyzed the two latest hostile takeover attempts in France: the Veolia vs. Suez case as well as the Vivendi vs. Ubisoft one.
The first one began in August 2020 when Veolia revealed it had made an offer to Engie in order to purchase 29.9% of its participation in Suez at a 50% premium, to which Suez responded by stating that its board had unanimously come to the conclusion that the offer was unsolicited. As for the latter, it opposed Vivendi and subsequently, Vincent Bolloré to Ubisoft and the Guillemot brothers starting 2015, when it became apparent that Vivendi was preparing a takeover of the company through a toehold tactic (buying shares in the open market prior to making a public offer).
Other than being the two most recent hostile takeover attempts, these two examples have also been chosen because they present an instance where the hostile takeover bid was successful (Veolia vs. Suez) and another one where it wasn’t (Vivendi vs. Ubisoft). The latter is not a hostile takeover attempt per say as no bid was ever filed or sent to the AMF but the management of Ubisoft did still consider it a hostile attack against the company and most importantly, defense mechanisms were deployed or attempted in order to prevent what they perceived as a hostile threat.
The reasoning behind the refusal of the proposals while debatable, seems to be different. In Ubisoft’s case, given how the operation ended (with Ubisoft facilitating the exit of Vivendi and buying back some of its shares at a premium), it is safe to say that Ubisoft was not acting under a price improvement theory and instrumentalizing their refusal as a bargaining tactic.
As for Suez, the rationale for the rejection of the offer is less clear cut: on the one hand, at the beginning, they started by rejecting it and employed or planned to employ more radical methods (sale of crown jewels assets, poison pills, and not consulting the Works Council for example) that are not consistent with the price improvement theory. On the other, Suez did look for a white knight (that would potentially offer a higher price) and did end up reach an agreement with Veolia and the transaction did become friendly, which indicates that Suez was able to obtain at least some improvements on the initial offers and some of its demands.
We find that both cases support the idea that the effectiveness of the defenses depends more on the acquirer than on the target company or the tactic’s inherent efficiency.
In the case of Ubisoft, there is no doubt that the various measures activated, and the actions undertaken have worked in their favor and have enabled them to win battles, particularly with investors at general meetings, in addition to having the support of the public. Nevertheless, the only defense that effectively and permanently helped fend Vivendi off was the greenmail tactic (where a target offers and negotiates to buy back its shares from a potential buyer at a premium in order to prevent them from purchasing any more stock or initiating a formal hostile takeover). And even in this scenario, the acceptance of the target’s offer is at the hands of the bidder who can refuse them and carry their initial plans out. In other words, Ubisoft’s offer to Vivendi worked because Vivendi was willing to accept it. As for Vivendi’s reasons, we can only speculate about them: the reticence of the target’s management, predatory behavior from Vivendi, the desire to make an easy profit or the proposal of a premium more important than the synergies envisaged, these might or might not be some of the firm’s hidden motives.
In Suez’s case, they employed aggressive antitakeover techniques with the goal of having an impact on the synergies cited by Vivendi, in order to make them less interested in acquiring Suez. For instance, even though Vivendi had listed a number of strategic assets, and despite the negative effects it might have had on the firm in the long run, Suez did not shy away from trying to sell its waste activities in Australia. However, even these actions were not enough to prevent the takeover. In fact, Veolia did not back down and instead, resorted to filing lawsuits against Suez. Moreover, Veolia had identified € 500 million’s worth of synergies, meaning that the acquisition would still be profitable for them. This element is also in line with our hypothesis.
Furthermore, whereas the beginning stages of Suez’s acquisition process indicated a high level of hostility, it did become eventually friendly, as the two companies came to an agreement, with an improved price per share. However, this was only possible because all of their defense efforts failed for a multitude of reasons (lack of time, determination of Veolia, ongoing litigations etc.). With Veolia’s bid becoming more and more inevitable, Suez had no other choice but to switch strategies and instead of wanting to do away with the transaction, they tried to bargain for a price improvement. It is when they ended up doing so that Suez was able to benefit from the efficiency of antitakeover defense mechanisms as they were able to successfully negotiate a better price for the shareholders. Indeed, not only did Veolia wish from the beginning for a friendly takeover, but the transaction would have also been more arduous. Political pressure, antitakeover provisions, expensive litigations and the respect of French, European and international frameworks would have put a financial and operational strain on Veolia. In that sense and in this context, antitakeover techniques are in fact efficient.
In addition to the previous elements, the Vivendi vs. Ubisoft case shows that defense mechanisms can be powerful when companies can anticipate hostile takeovers or have the time to prepare for them.
1. The regulation set by the Commercial Code and the AMF allowed Ubisoft to be aware of what Vivendi was planning in advance, giving it at least some visibility, especially in the beginning stages when Vivendi did not deny that they might want to take over the company. It consequently gave Ubisoft indications of their potential intent and of the necessity to start setting reactive measures up.
2. Vincent Bolloré (the bidder’s CEO) and Vivendi are known for acquiring companies despite them not always being willing to do so, with the latest example being the hostile acquisition of Gameloft, also owned by the Guillemot family (the founders of Ubisoft). The management thus already knew what could happen to them and that they needed to defend themselves in an efficient manner.
3. Most importantly, Vivendi never launched a formal hostile takeover on Ubisoft. The firm did acquire shares of the company on the open market but the period starting from the first purchase of shares and ending with the final agreement between Ubisoft lasted 2 and a half years, giving Ubisoft time to plan their responses and strategies, which was probably a factor in the company’s successful defense against Vivendi.
This is even more apparent when contrasting it with the Veolia vs. Suez case where different circumstances and time constraints had a negative impact on the effectiveness of antitakeover defense mechanisms. First, Veolia’s initial offer to Engie took place in August, benefiting from summer holidays that resulted in a longer reaction time from Suez for instance. Moreover, Veolia had not shown any previous inclinations in purchasing Suez. In addition to that, the instances where Veolia tried to implement a white knight defense were met with failure due to insufficient timing. For instance, Suez only gave a month to Ardian to consider making an offer, because it did not have enough time and the necessity to move quickly in order to comply with the transaction’s calendar due to Veolia’s imminent bid. Ardian ended up making an incomplete and counteroffer as they judged that they did not have enough time to thoroughly analyze the company. This finding goes in the same direction as our hypothesis that links the effectiveness of antitakeover defenses to anticipating the offer and having enough time to set it into motion.
To conclude, defense mechanisms should not be judged on a definitive basis but should always be put back into perspective, not only with regards to the companies that use them but also to the context and timing of the hostile process and most importantly, the – hidden – desired outcomes of both the target and the bidder. l
References
D. P. Baron (1983), “Tender Offers and Management Resistance”, The Journal of Finance, 38(2), 331-343.
T. W. Bates & D. A. Becher (2017), “Bid Resistance by Takeover Targets: Managerial Bargaining or Bad Faith?”, The Journal of Financial and Quantitative Analysis, 52(3), 837-866.
D. M. DePamphilis (2022), “Chapter 3 - The Corporate Takeover Market: Common Takeover Tactics, Antitakeover Defenses, and Corporate Governance”, In Mergers, Acquisitions, and Other Restructuring Activities (Eleventh Edition) (pp. 65-96), Academic Press.
G. W. Schwert (2000), “Hostility in Takeovers: In the Eyes of the Beholder?”, The Journal of Finance, 55(6), 2599-2640.
