Hostile Takeovers and Defense Strategies in M&A Part II

Do you know mergers & acquisition (M&A) can also be Hostile? Do you think litigation is the only way of turning down a ‘Hostile Takeover’? If not, what all are the other ways?

Finally, do you know terms like Pac-Man, Poison Pill, and Crown Jewel have something to do in Hostile Takeovers?

Before we get to know the various strategies against Hostile Takeovers, first just begin by defining a Hostile Takeover. “Hostile Takeover” is defined as a practice where a company (acquiring firm) puts a bid on another company (target firm) which is being opposed by the management of the targeted company which furthermore advises its shareholders not to sell to the acquiring firm.

Also, if a bid is placed for the shares of the target company without informing its board and is directly aimed to the shareholders, then also it is termed as hostile takeover.

The motives behind a hostile takeover are usually the same as with other mergers and acquisitions, except one additional reason, that the most effective way of replacing an ineffective board of directors or management of a targeted firm, is through a hostile takeover. A hostile takeover could therefore sometimes, not always, also be seen as an effective market transaction, which simply replaces a bad management, in order to gain increased company value for the acquiring company as well as for the shareholders of the targeted firm,

Strategies against Hostile Takeovers

The objective for using any of the defense strategies is that the acquirer should not able to gain immediate control over the target company and target company can use a defense mechanism to make acquisition staggered and make the bid more expensive for the bidder. These strategies have very interesting names, as explained below -

1) Greenmail

Greenmail or greenmailing is the practice where acquiring firm purchase enough shares in the target firm to threaten a takeover, thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover.

The term is derived from blackmail and greenback, as attempts by well-financed individuals to blackmail a company for takeover and then moves back when sufficient money is given. If the bidders’ interests are short-termed profit rather than long-termed corporate control then Greenmail is an effective and simple defense measure.

2)Pac Man

In this strategy a target firm initiates takeover of its possible acquirer. The Pac-Man defense is a defensive option to cut 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.

3)White Knight

Here the management of target firm chooses an acquirer it prefers which is referred as ‘White Knight’. Usually this strategy is adopted by a struggling target firm which may be under threat, for hostile takeover, due to its financial standing.

A white knight can be chosen for several reasons such as- friendly intentions, belief of better fit, and belief of better synergies, belief of not dismissing employees or historical good relationships. The targeted company may or may not remain independent but instead slips away from a hostile bidder which would suggest greater restructuring.

4) White Squire

Here, usually the management of target firm seeks one of its largest shareholders, which it considers somewhat friendly, to be its acquirer to avoid being acquired by some other rival, somewhat similar to white Knight strategy with a difference that instead of acquiring a majority stake in the targeted company the white squire acquires a smaller portion. This friendly acquirer is referred as ‘White Squire’. Here the targeted company will remain mostly independent as the main intent is just to prevent the takeover by third entity whose takeover is perceived to be less favourable.

Squire may get discount on shares, large dividends, or seats on the board if it agrees to be the acquirer. A white squire is not always needed to be found but can also be created by raising an investment fund with the help of financial advisors like hedge funds and banks.


  • Mergers & Acquisitions: Hostile takeovers and defense strategies against them, Erik Yang and Samim Zarin, 2011
  • Mergers, Acquisitions and Hostile Takeovers, Richard E Murphy, 2006
  • Mergers & Acquisitions, Hostile Transactions-II by Kai Li, 2012
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