Business Glossary

competition that erupts when outsiders attempt to gain control of a company's management. This requires soliciting a sufficient number of votes by proxy to unseat the existing management. The fights (battles) generally occur when the present management is performing poorly; however, the odds of outsiders winning a proxy fight are generally slim.

combination of two or more companies into one, with only one company retaining its identity. Typically, the larger of the two companies is the company whose identity is maintained. It often involves an exchange of stock, which avoids taxes; the purchase (accounting) method, where goodwill is recorded, must be used. The merger of two companies can be accomplished in one of two ways. The acquiring company can negotiate with management of the other company, or it can make a tender offer directly to the stockholders of the company it wants to take over.

merger or leveraged buyout slang for situation in which stockholders are forced, for lack of attractive alternatives, to accept undesirable terms, such as junk bonds instead of cash or equity.

takeover jargon for a tender offer that is completed quickly, usually because it was priced attractively. Blitzkreig translates from the German as "lightning-like war" and was used to describe World War II bombing raids. Legislation passed in the 1960s was aimed at curtailing surprise takeovers, so the term is relative.

the most desirable entities within a diversified corporation as measured by asset value, earning power and business prospects. The crown jewels usually figure prominently in takeover attempts; they typically are the main objective of the acquirer and may be sold by a takeover target to make the rest of the company less attractive.

combination of two or more companies into one, with only one company retaining its identity. Typically, the larger of the two companies is the company whose identity is maintained. It often involves an exchange of stock, which avoids taxes; the purchase (accounting) method, where goodwill is recorded, must be used. The merger of two companies can be accomplished in one of two ways. The acquiring company can negotiate with management of the other company, or it can make a tender offer directly to the stockholders of the company it wants to take over.

takeover of a company against the wishes of current management and the board of directors. This takeover may be attempted by another company or by a well-financed raider If the price offered is high enough, shareholders may vote to accept the offer even if management resists and claims that the company is actually worth even more. If the acquirer raises the price high enough, management may change its attitude, converting the hostile takeover into a friendly one. Management has many weapons at its disposal to fend off a hostile takeover, such as greenmail, poison pill, the scorched-earth policy, and suicide pills, among others. Also called unfriendly takeover.

federal legislation enacted in 1968 that imposes requirements with respect to public tender offers. It was inspired by a wave of unannounced takeovers in the 1960s, which caught managers unawares and confronted stockholders with decisions they were ill prepared to make, The Williams Act and amendments now comprise Sections 13(d) and 14(d) of the securities exchange act of 1934. The law requires the bidder opening a tender to file with both the Securities and Exchange Commission and the target company a statement detailing the terms of the offer, the bidder's background, the cash source, and his or her plans for the company if there is a takeover. The same information is required within 10 days from any person or company acquiring 5% or more of another company. The law mandates a minimum offering period of 20 days and gives tendering shareholders 15 days to change their minds. If only a limited number of shares are accepted, they must be prorated among the tendering stockholders.

corporation's purchase of its own outstanding stock. A buyback may be financed by borrowings, sale of assets, or operating cash flow. Its purpose is commonly to increase earnings per share and thus the market price, often to discourage a takeover. When a buyback involves a premium paid to an acquirer in exchange for a promise to desist from takeover activity, the payment is called green-mail. A buyback having a formula and schedule may also be called a share repurchase plan or self-tender.

opening price for a stock that is significantly higher or lower than the previous day's closing price. For example, if XYZ Company was the subject of a $50 takeover bid after the market closed with its shares trading at $30, its share price might open the next morning at $45 a share. There would therefore be a gap between the closing price of $30 and the opening price of $45. The same phenomenon can occur on the downside if a company reports disappointing earnings or a takeover bid falls through, for example. Stocks trading on the New York or American Stock Exchange may experience a delayed opening when such an event occurs as the specialist deals with the rush of buy or sell orders to find the stock's appropriate price level.

legal barrier erected to prevent a takeover attempt from becoming successful. For example, a target company may appeal to the state legislature to pass laws preventing the takeover. Or the company may embark on a scorched-earth policy, making the company unappealing to the suitor.

Leveraged BuyOut in which target company assets or activities are sold off to repay the debt that financed the takeover.

privilege offered a white knight (friendly acquirer) by a target company of buying crown jewels or additional equity. The aim is to discourage a hostile takeover.

lucrative contract given to a top executive to provide lavish benefits in case the company is taken over by another firm, resulting in the loss of the job. A golden parachute might include generous severance pay, stock options, or a bonus. The tax reform act of 1984 eliminated the deductibility of "excess compensation" and imposed an excise tax. The tax reform act of 1986 covered matters of clarification.

takeover of a company, using borrowed funds. Most often, the target company's assets serve as security for the loans taken out by the acquiring firm, which repays the loan out of cash flow of the acquired company. Management may use this technique to retain control by converting a company from public to private. A group of investors may also borrow funds from banks, using their own assets as collateral, to take over another firm. In almost all leveraged buyouts, public shareholders receive a premium over the current market value for their shares. When a company that has gone private in a leveraged buyout offers shares to the public again, it is called a reverse leveraged buyout.

person or firm engaged in arbitrage. Arbitrageurs attempt to profit when the same security or commodity is trading at different prices in two or more markets. Those engaged in risk arbitrage attempt to profit from buying stocks of announced or potential takeover targets.

offer to pay an equal price for all shares tendered by a deadline; contrasts with two-tier bid.

defensive tactic used by a corporation trying to defeat a takeover attempt by a raider or unfriendly bidder. The target corporation will issue a massive amount of bonds that must be redeemed at a mandatory higher redemption value if the company is taken over. The redemption value of these bonds therefore expands when the company is threatened-like macaroni when it is cooked-making the takeover prohibitively expensive to complete.

defensive tactic to ward off a hostile takeover. Management threatens that, in the event of a successful takeover, the entire management team will resign at once, leaving the company without experienced leadership. This is a version of the poison pill defense.

strategic move by a takeover-target company to make its stock less attractive to an acquirer. For instance, a firm may issue a new series of preferred stock that gives shareholders the right to redeem it at a premium price after a takeover. Two variations: a flip-in poison pill allows all existing holders of target company shares except the acquirer to buy additional shares at a bargain price; a flip-over poison pill allows holders of common stock to buy (or holders of preferred stock to convert into) the acquirer's shares at a bargain price in the event of an unwelcome merger. Such measures raise the cost of an acquisition, and cause dilution, hopefully deterring a takeover bid. A third type of poison pill, known as a people pill, is the threat that in the event of a successful takeover, the entire management team will resign at once, leaving the company without experienced leadership.

surprise public tender offer, which was ended by the williams act.

takeover bid so attractive in terms of price and other features that target company directors, who might be opposed for other reasons, must approve it or risk shareholder protest.

British term for a practice whereby a raider instructs brokers to buy all the available shares of another company at the opening of the market, thus giving the acquirer a significant holding before the target company gets wise to the undertaking. In Londonbased markets, the practice is restricted by the City Code on Takeovers and Mergers.

takeover tactic whereby a third party poses as a white knight then turns coat and joins an unfriendly bidder.

board of directors of a company in which a portion of the directors are elected each year, instead of all at once. A board is often staggered in order to thwart unfriendly takeover attempts, since potential acquirers would have to wait a longer time before they could take control of a company's board through the normal voting procedure. Normally, all directors are elected at the annual meeting.

fund of liquid assets (cash) set aside by a corporation to pay for a takeover or to defend against a takeover. Traders will say that a company has a war chest that it plans to use to take over another company. Or traders might say that a particular company will be difficult to take over because it has a large war chest that it can use to defend itself by buying back its stock, making an acquisition of its own, paying for legal fees to mount defenses, or taking other defensive measures.

technique used by a company that has become the target of a takeover attempt to make itself unattractive to the acquirer. For example, it may agree to sell off the most attractive parts of its business, called the crown jewels, or it may schedule all debt to become due immediately after a merger.

1. the buying and selling of the company's securities based on material information relating to the company that has not been made public. Insider trading according to this definition is against the law in most countries.
2. the buying and selling of shares of a public company by its officers, directors, and stockholders who own more than 10% of the company's stock. In the United States, such transactions must be reported monthly to the SEC under Section 16 of the Securities Exchange Act of 1934: reporting rules for similar trading may also exist in different countries or markets.

accord by a raider to abstain from buying shares of a company for a specified period.

letter from an investment banking firm that it is "highly confident" that it will be able to arrange financing for a securities deal. This letter might be used to finance a leveraged buyout or multibillion-dollar takeover offer, for example. The board of directors of the target firm might request a highly confident letter in evaluating whether a proposed takeover can be financed. After the letter has been issued and the deal approved, the investment bankers will attempt to line up financing from banks, private investors, stock and bond offerings, and other sources. Though the investment banker professes to be highly confident he can arrange financing, the letter is not an ironclad guarantee of his ability to do so.

process of bringing back into publicly traded status a company-or a division of a company-that had been publicly traded and taken private. In the 1980s, many public companies were taken private in Leveraged BuyOuts by corporate raiders who borrowed against the companies' assets to finance the deal. When some or all of the debt incurred in the leveraged buyout was repaid, many of these companies were in sufficiently strong financial condition to go public again, enriching the private stockholders as well as the investment bankers who earned fees implementing these deals.

stock affected by takeover rumors or activities.

individual or corporate investor who intends to take control of a company by buying a controlling interest in its stock and installing new management. Raiders who accumulate 5% or more of the outstanding shares in the target company must report their purchases to the Securities and Exchange Commission, the exchange of listing, and the target itself.

payment of a premium to a raider trying to take over a company through a proxy contest or other means. Also known as bon voyage bonus, it is designed to thwart the takeover. By accepting the payment, the raider agrees not to buy any more shares or pursue the takeover any further for a specified number of years.

corporate strategy to fend off potential acquirers by taking on a large amount of debt and making a large cash distribution to shareholders. For example, XYZ Company, selling at $50 a share, may borrow $3 billion to make a one-time distribution of $20 a share to stockholders. After the distribution, the stock price will drop to $30. By replacing equity with $3 billion in debt, XYZ is a far less attractive takeover target for a raider or other company than it was before. Also called leveraged recap for short.

company that is the object of a takeover offer, whether the offer is friendly or unfriendly. In a hostile takeover attempt, management tries to use various defensive strategies to repel the acquirer. In a friendly takeover situation, management cooperates with the acquirer, negotiating the best possible price, and recommends that shareholders vote to accept the final offer.

friendly acquirer sought by the target of an unfriendly takeover.

magnitude of an omission or misstatement of accounting data that misleads financial statement readers. Materiality is judged both by relative amount and by the nature of the item. For example, even a small theft by the president of a company is material. Unfortunately, the Financial Accounting Standards Board (FASB)has no specific criteria as to what is or is not material. If an item is material, it should be disclosed in the body of the financial statements or footnotes. Some CPA firms use a 5% test for materiality. The SEC in Accounting Series Release No. 159 provides that an item is material if it changed by 10% or more relative to the prior year.

provision in an indenture giving bondholders the privilege of redemption at PAR if certain designated events occur, such as a hostile takeover, the purchase of a big block of shares, or an excessively large dividend payout. Poison puts, or superpoison putsas the more stringent variations are called, are popular antitakeover devices because they create an onerous cash obligation for the acquirer. They also protect the bondholder from the deterioration of credit quality and rating that might result from a Leveraged BuyOut that added to the issuer's debt.

1. financial or accounting step that avoids legal or tax consequences. Commonly used in reference to safe harbor leasing, as permitted by the Economic Recovery Tax Act of 1981 (ERTA). An unprofitable company unable to use the investment credit and Accelerated Cost Recovery System (ACRS) liberalized depreciation rules, could transfer those benefits to a profitable firm seeking to reduce its tax burden. Under such an arrangement, the profitable company would own an asset the unprofitable company would otherwise have purchased itself; the profitable company would then lease the asset to the unprofitable company, presumably passing on a portion of the tax benefits in the form of lower lease rental charges. Safe harbor leases were curtailed by provisions in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).
2. provision in a law that excuses liability if the attempt to comply in good faith can be demonstrated. For example, safe harbor provisions would protect management from liability under Securities and Exchange Commission rules for financial projection made in good faith.
3. form of shark repellent whereby a target company acquires a business so onerously regulated it makes the target less attractive, giving it, in effect, a safe harbor.

firm specializing in the early detection of takeover activity. Such a firm, whose primary business is usually the solicitation of proxies for client corporations, monitors trading patterns in a client's stock and attempts to determine the identity of parties accumulating shares.

form required under Section 13d of the securities act of 1934 within ten business days of acquiring direct or beneficial ownership of 5% or more of any class of equity securities in a publicly held corporation. In addition to filing with the Securities and Exchange Commission, the purchaser of such stock must also file the 13d with the stock exchange on which the shares are listed (if any) and with the company itself. Required information includes the way the shares were acquired, the purchaser's background, and future plans regarding the target company. The law is designed to protect against insidious takeover attempts and to keep the investing public aware of information that could affect the price of their stock.

corporate raider who takes over a company planning to sell large assets in order to repay debt. The raider calculates that after selling the assets and paying off the debt, he or she will be left with valuable assets that are worth more than his or her purchase price.

potential takeover target that has not yet been approached by an acquirer. Such a company usually has particularly attractive features, such as a large amount of cash, or undervalued real estate or other assets.

acquisition based on analysis of the operational benefits of consolidation. Implicitly contrasts with the type of takeover based on "paper values" that characterized the "merger mania" of the 1980s-undervalued stock bought using junk bonds ultimately repayable from the liquidation of acquired assets and activities. A strategic buyout focuses on how companies fit together and anticipates enhanced long-term earning power.

technique used by a corporation that is the target of a takeover bid to defeat the acquirer's wishes. The target company defends itself by threatening to take over the acquirer and begins buying its common shares. For instance, if company Amoves to take over company B against the wishes of the management of company B, company B will begin buying shares in company Ain order to thwart A's takeover attempt. The Pac-Man strategy is named after a popular video game of the early 1980s, in which each character that does not swallow its opponents is itself consumed.

purchase of all of a company's publicly held shares by the existing management, which takes the company private. Usually, management will have to pay a premium over the current market price to entice public shareholders to go along with the deal. If management has to borrow heavily to finance the transaction, it is called a Leveraged BuyOut (LBO). Managers may want to buy their company for several reasons: They want to avoid being taken over by a raider who would bring in new management; they no longer want the scrutiny that comes with running a public company; or they believe they can make more money for themselves in the long run by owning a larger share of the company, and eventually reap substantial profits by going public again with a reverse leveraged buyout.

close monitoring of trading patterns in a company's stock by senior managers to uncover unusual buying activity that might signal a takeover attempt.

Japanese term for a takeover.

white knight who buys less than a majority interest.

anti-takeover device whereby a vulnerable company sells a large amount of stock to a friendly party at below-market prices. This puts a potential raider in a position where it must buy a sizable amount of stock at inflated prices to get control and thus helps perpetuate existing management.

arbitrage involving risk, as in the simultaneous purchase of stock in a company being acquired and sale of stock in its proposed acquirer. Also called takeover arbitrage. Traders called arbitrageurs attempt to profit from takeovers by cashing in on the expected rise in the price of the target company's shares and drop in the price of the acquirer's shares. If the takeover plans fall through, the traders may be left with enormous losses. Risk arbitrage differs from riskless arbitrage, which entails locking in or profiting from the differences in the prices of two securities or commodities trading on different exchanges.

poison pill with potentially catastrophic implications for the company it is designed to protect. An example might be a poison pill providing for an exchange of stock for debt in the event of a hostile takeover; that would discourage an acquirer by making the takeover prohibitively expensive, but its implementation could put the target company in danger of bankruptcy.

takeover bid where the acquirer offers to pay more for the shares needed to gain control than for the remaining shares; contrasts with any-and-all bid.

corporate amendment requiring that a substantial majority (usually 67% to 90%) of stockholders approve important transactions, such as mergers.

takeover offer that is so generous that management of the target company is unable to refuse it out of fear of shareholder lawsuits.

acquiring company that, acting to advance its own interests, outbids a white knight but that, not being unfriendly, is preferable to a hostile bidder.

stock that may be rumored to be a takeover target or the party to some other major transaction such as a merger or leveraged buyout. The stock may be subject to a rumor of a prospective deal, or a deal may have been announced that attracts additional bidders and the company is said to be in play. Arbitrageurs and other speculators will attempt to buy deal stocks before the deal is finalized or profit when the stock price rises. Of course, if there is no deal, these speculators may lose money if the stock falls back to its pre-rumor price.

stock traders' term, combining garbage and arbitrage, for activity in stocks swept upward by the psychology surrounding a major takeover. For example, when two leading entertainment stocks, Time, Inc., and Warner Communications, Inc., were in play in 1989, stocks with insignificant involvement in the entertainment sector became active. Garbatrage would not apply to activity in bona fide entertainment stocks moving on speculation that other mergers would follow in the wake of Time-Warner.

those who aid a company in fending off a takeover bid. "Killer bees" are usually investment bankers who devise strategies to make the target less attractive or more difficult to acquire.

stock traders' term, combining rumor and arbitrage, for buying and selling based on rumor of a takeover.