The high failure rate isn’t the only thing that keeps hostile takeovers from succeeding. Other possible drawbacks include tarnishing the hostile bidder’s deal-making record and significant costs for the acquisition in the form of consultant and regulatory compliance fees. Companies have also become more aware of hostile takeovers and utilize a variety of countermeasures to maintain the decision-making authority of their management. They can, for example, repurchase stock from shareholders or use a “poison pill,” which dilutes an acquirer’s voting rights in the target business significantly. Alternatively, they can create a “staggered board,” in which only a specific number of directors are reelected each year.
For those who are interested, here’s a message on poison tablets. There are three primary types, as explained in this Biryuk Law blog post: a flip-in, a “dead hand,” and a “no hand.” If the hostile bid is full cash for all of the target’s shares, shareholders can compel a pill redemption by a vote with a flip-in poison pill. A dead hand pill establishes a permanent board of directors, but a no-hand pill prevents the pill from being redeemed within a particular time frame. Other anti-takeover strategies include modifying contractual conditions to make the target’s agreements with third parties more difficult, putting the acquirer in debt, and demanding a supermajority shareholder vote for M&A activity.
The disadvantage of these, which require shareholder approval in some cases, is that they may prevent amicable purchases. (This is one of the reasons why poison tablets, which were popular in the 1980s and 1990s, became less popular in the 2000s.) However, many businesses believe the risk is warranted. 57 major firms utilized poison pills in March 2020 alone, in response to an activist threat or as a preventative step; Yahoo and Netflix are among those who have employed poison pills in recent years. (Full disclosure: Yahoo is TechCrunch’s parent company.) As an extra layer of security, tech behemoths frequently use protectionist share structures.
Facebook is a good example: the corporation has a “dual-class” structure designed to give CEO Mark Zuckerberg and a tiny number of insiders the most voting power. Twitter is unique in that it only has one class of stock, but its board of directors retains the power to issue preferred stock with special voting rights and other benefits. (Twitter is considering using a poison pill, according to the Wall Street Journal.)
Some corporate raiders, however, will not be deterred, whether for strategic reasons or because they feel the target company’s management isn’t delivering on its promises, as in the case of Elon Musk and Twitter. They could try to enlist the help of other shareholders to increase their chances of success, or they might put public pressure on a company’s board of directors to review an offer. They might also apply the Revlon rule, which states that when a hostile acquisition is near, a firm’s board of directors must make a reasonable attempt to get the maximum value for the company. But, as history has shown, hostile takeovers are rarely foreseeable, even when they succeed.
