Letting Down Your Guard

With takeover defenses being increasingly dismantled, will a rise in hostile acquisitions be the result?

Prospective Google Inc. shareholders awaiting the much anticipated $2.7 billion initial public offering found that the company is wrapping itself in a takeover defense that keeps co-founders Larry Page and Sergey Brin firmly in control. A two-tier voting structure gives Class B stockholders — Page and Brin, for the most part — 10 votes for each share, with 1 vote for each of the Class A shares being offered.

“In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google,” its Securities and Exchange Commission filing explained. That “will also make it easier for our management team to follow the long-term, innovative approach” that the company favors.

What Google was adamantly not following was the recent trend toward dismantling takeover defenses rather than initiating them. In response to shareholder demands, Goodyear Tire & Rubber Co., FirstEnergy Corp., ConAgra Foods Inc., and more than a dozen others have terminated their poison pills or agreed not to extend their current ones this year. This puts 2004 on a pace to rival 2003, when 29 companies revoked their pill provisions, up from 18 in 2002, according to Sharkrepellent.net, a mergers-and-acquisitions Website managed by New York­based TrueCourse Inc. Other companies, such as Goldman Sachs, are considering eliminating their staggered boards, while still others are opting to change their supermajority voting provisions.

Says Steve Carr, a partner at Boston-based law firm Goodwin Procter LLP: “We are witnessing what happens when you combine more-aggressive shareholders with boards that are paying more attention to corporate-governance matters.”

The wisdom of eliminating traditional “porcupine” measures, now, as always, is subject to debate. While some shareholders insist that such defenses prevent them from getting the best return on their investment, “if I were a CFO of a target company, I would sure prefer to have a staggered board or a poison pill in place than not,” says Carr, who is co-chair of his firm’s corporate-governance and M&A group. That’s especially true “since CFOs of targets often lose their jobs in a hostile takeover.” (See “Acquired Tastes.”)

These days, of course, CFOs have little recourse in the face of increased regulation and shareholder demands. So for some, eliminating takeover measures is simply one more reason to refocus on their businesses. Unwinding defenses “is consistent with the changing landscape of good corporate-governance practices,” says FirstEnergy senior vice president and CFO Richard H. Marsh. Besides, he says, “the best defense against any hostile bid is to keep the share price growing, have a high P/E ratio, and maintain strong operations.”

Bring It On

When the popularity of takeover defenses swelled in the early 1980s, porcupine amendments were aimed at repelling the efforts of such corporate raiders as T. Boone Pickens and Carl Icahn. Never guaranteed to merger-proof a company, the provisions had their highest perceived value in making a deal so difficult that raiders would look elsewhere for prey. Poison pills may trigger issuance of preferred stock with severe redemption provisions, for example, while staggered boards make winning control in one corporate meeting effectively impossible. In practice, however, the defenses often serve as leverage that target companies could use in negotiating higher offers.

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