The abrupt decline in stock prices has left companies concerned about their vulnerability to a hostile takeover. And many are likely reviewing their defensive profiles, lawyers agreed.
As a consequence, at least one old defensive standby, the poison pill, may soon see resurgence. “There’s definitely been an uptick in interest in poison pills,” said Michael O'Bryan, Co-Chair of the Morrison Foerster’s Mergers & Acquisitions Group.
A number of unsolicited offers may be made, given market volatility, George Casey, Co-Head of M&A at Shearman & Sterling explained. Companies that have available cash are more likely to feel comfortable making the unsolicited proposals. He pointed to Exelon’s bid for NRG as an example of a recent unsolicited offer.
And though companies may be slow to adopt a poison pill, companies are likely to be preparing them as part of their defensive arsenal. “There is no need really for a company to adopt a poison pill preemptively, as long as it has the poison pill documents drafted and ready if the need arises,” explained George Casey, Co-Head of M&A at Shearman & Sterling.
Commodity related industries, such as the oil and gas sector, could be those most concerned about vulnerability to hostile takeovers, three of the lawyers agreed. Technology companies also may be revising their views towards poison pills, said Christopher Shen, senior attorney at Santa Clara, California-based venture capital firm Intel Capital.
Due to the dramatic rise and fall of commodity prices, there will likely be an increase in the adoption of poison pills in those businesses, explained David Elkouri of Hinkle Elkouri, LLC, Executive Vice President and Counsel to Petrohawk.
Petrohawk, a Houston-based oil and gas company, adopted a poison pill on 15 October. Mariner Energy also adopted a pill this month.
Hostile takeovers are rare in the oil and gas industry, Elkouri and an oil and gas banker agreed. However, because the underlying value of energy assets is much higher than companies’ current market caps, bidders may see the opportunity to come in and buy depressed shares, Elkouri said. Petrohawk and others trade a high volume of shares a day. Because hedge funds are unloading their shares so quickly, it would be easy for a buyer to buy a large block of stock without pushing the share price up.
Other industries, such as technology, which have not historically been known to adopt takeover defenses, could well implement a growing number of poison pills going forward, said Shen. Technology companies are known for having less robust takeover defenses compared to other sectors, partly because technology companies’ value lies in their employees, who can be driven away by a hostile takeover, he said.
However, the current market environment is leaving many of these listed tech companies with depressed valuations, Shen said, and the danger of losing employees from a hostile takeover may also have lessened. “Depressed valuations mean more and more employees at companies are not seeing any potential upside to their equity holdings - if an unsolicited offer comes in, they might even welcome it.”
Some companies may look to the structures of recent tech M&A deals for insight on protecting their own employees and shareholders in the event of a hostile takeover, Shen said, pointing to listed California-based software giant Oracle’s unsolicited takeovers of Peoplesoft in January 2005 and BEA Systems in April 2008. According to Shen, both Peoplesoft and BEA had severance pay provisions for their employees in place in the event of a change of control.
Morrison’s O’Bryan also pointed to Yahoo’s reaction to Microsoft’s unsolicited bid earlier this year as an example of defensive maneuvers companies may take to stave off a takeover.
Poison pills today are used with more technical precision. “They are really kept in the company’s defensive arsenal and deployed when necessary,” Casey explained.
O’Bryan also pointed out that pills are more narrowly tailored than they had been in the past, making them easier to justify to shareholders. For instance, in the past, poison pills typically were adopted for a 10-year duration; now the time period is much shorter.
Poison pills are not meant to prevent deals, but to give company management leverage to negotiate with any potential bidders and act in the long-term best interests of the shareholders, four of the lawyers agreed. Companies will still be able to negotiate friendly mergers even with poison pills in place, Strock and Gill added.
“You cannot read too much into the adoption of a pill,” Casey said. On the other hand, if you do adopt a pill in the absence of an unsolicited offer it can be seen as a negative by shareholders. “It also can indicate that the company is concerned about its vulnerability,” he added.
by Bryce Covert, Abigail Roberts and Colleen Taylor
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