Antitakeovcr Tactics'.
Management 42, Stockholders 0
Idalene F. Kesner and Dan R. Dalton
is an assistant professor
I d a l e n e F. K e s n e r
at the School of Business Administration
at the University of North Carolina at
Chapel Hill. Dan R. Dalton is an associate
professor of business administration at the
School of Business at Indiana University.
This article was funded in part by a grant
from the Business Foundation of Nort[1
Carolina, Inc.
_..~.~ - ~ ~:~..+.':q*.%
~,,~,~k~- .'~ _
•
• ",;~.,~,'~
•~ 2 . '"~. :~
7 cus in acquisitions and the variety and
....~ , ~
"White knights," "shark repellents," "poi-
son pills," "golden parachutes," and
"greenmail" all sound more appropriate to
comic book adventure than to the pages of
Business Week ~and the Wall Street Journal.
But these graphic terms describe the new
business p h e n o m e n o n of antitakeover
strategies. They are weapons in a very real
battle that stockholders appear to be losing
badly.
nalysts a g r e e that today's
A business climate is more dy-
namic and complex than ever
before. We are in the midst o f a
m e r g e r boom. A total o f 2,321 merg-
ers and acquisitions took place in 1982,
and by 1984 that figure climbed to
2,543. According to W. T. Grimm &
Company, $53.8 billion was spent on
mergers in 1982, $73.1 billion in 1983,
and $122 billion in 1984. Further-
more, some m e r g e r specialists regard
this as only the tip o f the proverbial
iceberg, noting that the trend has not
yet spread to high technology indus-
tries.
Although there have been o t h e r
m e r g e r movements in the history o f
the ~ n i t e d States, most analysts agree
that the c u r r e n t trend is m a r k e d by
two unique features: a n a r r o w e r f o -
forcefulness o f executive responses in
target firms.
Business Horizons
17
Acquisition Focus
n the c u r r e n t wave of acquisi-
I tions, corporate leaders are look-
ing almost exclusively to related
fields. Management seems to be in-
terested in forming more economi-
cally logical companies that are better
able to take advantage o f existing ex-
ecutive expertise.
T h e emphasis is no longer on di-
versified conglomerates, as it was 20
years ago. In the 1960s highly diver-
sified firms sold at a premium. T h e
theory was that, by involving them-
selves in multiple industries, compa-
nies were better able to minimize, or
at least spread a r o u n d , the adverse
effects o f d o w n t u r n s in any one in-
dustry. Thus, although particular
areas inevitably would be hurt by eco-
nomic shifts, p o o r p e r f o r m a n c e could
be offset by holdings in o t h e r indus-
tries. Investors were t h e r e f o r e willing
/ Sel)teml~er-Octol)er 1985
 " . . today's top managers
are m o u n t i n g antitakeover
strategies that make their forerunners
pale in comparison. In fact, these new
defensive strategies have begun
to look like warfare."
18
to pay a p r e m i u m for this increased
stability.
Today's market is substantially dif-
ferent. This cl'aange is in part a func-
tion o f the increased emphasis on
institutional investing. A recent Se-
curities and Exchange Commission
(SE'C) report, for example, notes that
in 1933 institutions owned less than
8.5 percent o f the outstanding secu-
rities listed on the New York Stock
Exchange. In 1979, institutions held
approximately 35 percent o f the value
o f all stock outstanding. With recent
growth in private and public pension
funds and retirement plazas, this per-
c e n t a g e is i n c r e a s i n g d r a m a t i c a l l y .
The~e groups maintain full-time an-
alysts, who c o n t i n u a l l y s u r v e y the
market. Rather than buying in a wide
variety o f industries, they focus on a
select few that, according to their
analyses, are moving upward. Con-
sequently, in today's market, stock in
many o f the large diversified con-
glomerates sells at a discount r a t h e r
than a p r e m i u m .
T h e situation is similar to the way
shoppers regard a p r e w r a p p e d pack-
age o f fruit. Aware that they will get
some bad pieces along with the good,
most knowledgeable shoppers p r e f e r
to make their own selections fi'om bins.
Institutional investment analysts may
be t h o u g h t o f as knowledgeable shop-
pers. T h e i r job is to study both the
market and the economy and to invest
in those industries and companies that
look most promising. If the economy
is recovering and housing starts are
up, they will invest in building supply
companies r a t h e r than in conglom-
erates which are into everything from
building supplies to musical instru-
ments. Recent studies o f conglomer-
ate m e r g e r s h i g h l i g h t this view.
Examining p e r f o r m a n c e over several
periods revealed that many o f the
firms e x p e r i e n c e d p o o r e r p e r f o r m -
ance than they might have if" the
mergers had not taken place. ~
Executive Response
second i m p o r t a n t difference
A in the c u r r e n t m e r g e r boom
is the response from top ex-
ecutives in the target firms. Execu-
tives n e v e r have b e e n p a r t i c u l a r l y
enthusiastic about losing control over
their firms, and in the past many have
chosen to fight such attempts. Yet to-
day's top managers are m o u n t i n g an-
titakeover strategies that make their
f o r e r u n n e r s pale in comparison. In
fact, these new defensive strategies
have begun to look like warfare.
It is in this area that the terms
"greenmail," "poison pills," and "shark
repellent" generally surface. It is here,
too, that the struggle begins. As some-
times happens in o t h e r c o r p o r a t e bat-
tles, it is the stockholder who is hurt
most by these tactics. According to
Gregg Jarrell, a m e m b e r o f the SEC
Advisory Committee on T e n d e r Of-
fers, o f the approximately 100 cases
r e p o r t e d in which t a r g e t m a n a g e -
ment defeated a hostile takeover at-
tempt, the defensive tactics resulted
I. A. M. Louis, "The Bottom Line on Ten
Big Mergers," Fortune, May 3, 1982: 84-89; "Do
Mergers Really Work?" Business Week, June 3,
1985: 88-100; "The Decade's Worst Mergers,"
Fortune, April 3(I, 1984: 262-270.
a l m o s t w i t h o u t e x c e p t i o n in large
losses o f wealth to the target stock-
holders.'-'
The Executives Who Say "No"
hY do so many managers
W fight what a p p e a r to be
h a n d s o m e takeover prop-
ositions? T h e exact reason remains a
mystery to most people. Certainly, the
adage that top executives "look out
for the best interests o f the stock-
h o l d e r s " seems s o m e w h a t naive.
Nearly all takeover attempts include
t e n d e r offers that are well above the
c u r r e n t market value for c o m m o n
stock. Recent studies note that com-
mon stock of" the takeover target in-
creases some 30 percent if the takeover
is successful. In unsuccessful attempts the
c o m m o n stock o f the target c o m p a n y
actually declines by three percent.
U n d e r these circumstances, it is dif-
ficult to argue that management serves
the interests o f its stockholders in
fighting a takeover attempt so fiercely.
In what many consider a classic ex-
ample o f the o u t r a g e o u s lengths that
m a n a g e m e n t may go to prevent take-
over, Wilson Foods Corporation, op-
e r a t i n g u n d e r C h a p t e r 11 o f the
Federal Bankruptcy Code, has re-
j e c t e d O c c i d e n t a l P e t r o l e u m ' s at-
tempts to acquire it. Wilson has gone
to Federal C o u r t to secure protection
from its creditors. Still, it rejects the
takeover bid. In Wilson's most recent
plan o f r e o r g a n i z a t i o n , its e q u i t y
2. G. A. Jarrell, "Inside the SEC's Panel on
Takeovers," Directors & Board.~, 8, 1983:28-33.

"Most analysts argue that, when
a firm buys its own stock back, it not only
cues other raiders that it is vulnerable but also
encourages the raiders to continue the tactic
elsewhere. Furthermore, the practice tends
to produce a pyramid effect."
holders would continue to hold their
respective interests in the firm.
Why do top executives fight fiercely
to defeat takeover attempts? T w o ex-
planations are popular, one personal
and the o t h e r pecuniary.
Many argue that executives in tiffs
position are driven by some level of
ego involvement. In this view, the
c o m p a n y is "theirs." T h e truth, o f
course, is that companies subjected to
such takeover attempts are the prop-
erty o f the stockholders. Still, top ex-
ecutives can become so e n t r e n c h e d in
their companies that they resist these
efforts and attempt to maintain their
"control" o f the c o m p a n y irrespective
o f the consequences to the stockhold-
ers.
A second explanation is based on
the fact that today's top executives are
enjoying compensation packages well
into the millions o f dollars. According
to Dun~ Business Month, 52 percent o f
a target firm's executives no longer
will be with the acquiring firm three
years after a m e r g e r or acquisition?
Clearly, then, a takeover can mean the
loss o f literally millions o f dollars in
revenues and perquisites ['or the dis-
placed executives.
W h e t h e r the widespread executive
resistance to takeover attempts is re-
lated to ego involvement or dollars
and cents is o f little consequence here.
T h e fact is that m o d e r n executives
fight actively to quash takeover at-
t e m p t s a i m e d at t h e i r c o m p a n i e s .
T h e y use a host o f novel defense strat-
3. "Surge in Executive Contracts," Dun's
Business Month, October 1981 : 86-88.
Antitakeover Tactics: Management 42, Stockholders 0
egies, a m o n g them greenmail, shark
repellent, poison pills, golden para-
chutes, and white knights.
• ~..
Greenmail: Takeover Ransom?
ne o f the most costly antitak-
O l e o v e r strategies is " g r e e n -
mail." In this case a buyer
acquires a substantial block o f a com-
pany's stock and then threatens a
t e n d e r offer. Management, afraid o f
losing c o n t r o l , buys out the p u r -
chaser, or would-be acquirer, at a pre-
mium. One example o f this occurred
in mid-1984. Walt Disney Produc-
tions paid Saul Steinberg $325 million
for his 4.2 million shares o f c o m p a n y
stock, an average o f $14.25 per share
more than he paid originally. Stein-
berg has been involved in several sim-
ilar transactions. His attempt to gain
control o f Chemical Bank in the late
1960s was similarly aborted by man-
agement. In 1980 his Reliance G r o u p
made $20 million before taxes when
directors o f the Penn Central Cor-
poration agreed to buy back their
c o m p a n y s shares from laim. ~
4. "The Fligh Price Disney Paid to Save It-
self." Bu,~iness Week, J u n e 25, 1984: 32-33. See
also "Should Companies Pay Takeover Ran-
som?" Dun's Review. May 1981 : 103-105.
19
O t h e r i n v e s t o r s have p r o f i t e d
handsomely by acquiring large blocks
o f a company's stock and threatening
takeover, knowing full well such a
company often succumbs to the threat.
R u p e r t K. Murdoch received a 35
percent p r e m i u m for his shares o f
W a r n e r Communications. T h e Bass
brothers netted $400 million after
T e x a c o bought back their 10 percent
stake at a $5 per share premium. Carl
Icahn has either attempted or suc-
cessfully used this same technique with
such companies as Saxon Industries,
H a m m e r m i l l Paper Company, G u l f &
Western, American Can Company,
Dan River, IVlarshall Field, and ACF
Industries. Boone Pickens bought a
hefty portion of Gulf's outstanding
shares and later sold them back at a
p r e m i u m . Kirk Kerkorian's stake in
C o l u m b i a Pictures e v e n t u a l l y was
b o u g h t back by the company. 5
T h e s e examples represent only a
few o f the many recent incidents.
Greenmail tactics have been subject to
considerable criticism. Most analysts
argue that, when a firm buys its own
stock back, it not only cues other raid-
ers that it is vulnerable but also en-
courages the raiders to continue the
tactics elsewhere. F u r t h e r m o r e , the
practice tends to p r o d u c e a pyramid
effect. One success provides the nec-
essary funds to threaten larger corn-
5. For further discussion see "Should Com-
panies Pay Takeover Ransom?" (note 4); "What
Carl lcahn Wants: Full Control of Companies,"
Business Week, December 12, 1983: 116-,I 17;
"'Corporate Raiders and Their Targets: Mak-
ing the Fight Fairer," Business Week, April 2,
1984: 29; "Boone Pickens, Company Hunter,"
Fortune, December 26, 1983: 54-60.
 panies, which in turn escalates tile not greenmail. In theory, the com- like many eul)laemisms, misleading.
process still more. A case in point is pany itself (Disney) was not involved. M a n a g e m e n t devises such "anaend-
Clabir Corporation, which first chased A second recent case provides an- merits" to restrict and, in sonle cases,
Edo, a small Long Island aircraft o t h e r illustration. Carl Icahn, a n o t h e r even prohibit one firm from taking
company. T h e profit fi'om this action well-known greenmailer, acquired five over another. T h e "shark" is tile cor-
helped Clabir move on General Host, percent o f Chesebrough-Pond's, lnc. porate raider, and tile "repellent" is
a firm ten times its own size, and tile I c a h n - - w l a o had recently a c q u i r e d management's proposal to prevent
gains from this action fueled its moves ACF Industries, I n c . - - w a n t e d to eli- hostile takeovers.
against Iroquois Brands and U.S. In- vest Polymer Corporation, a clivision Less t, nifornl than greenmail tac-
dustries. o f ACF. C h e s e b r o u g h - P o n d ' s b o u g h t tics, shark repellents come in various
Many stockholder advocates argue back lcahn's position and also ac- guises. One strategy, for example, is
that greenmail amounts to an invol- quired Polymer for $95 million. Asked to stagger terms o f office for directors
untary redistribt, tion o f assets. Share- if Chesebrough-Pond's woulcl have and eliminate the m a n d a t o r y retire-
holders do not get a chance to vote b o u g h t P o l y m e r w i t h o u t p r e s s u r e m e n t age. When directors' terms ex-
on tile allocation o t money that oth- fi'om Icahn, a c o m p a n y spokesperson pire at varying times, it is difficuh for
20 erwise would be available for divi- said, "I think it's fair to say we weren't raiders or unhapl~y stockholders to
dends. Others insist that all looking fbr an acquisition like that." m o u n t a quick contest for hoard con-
stockholders s h o u l d have tile right to Once again, however, t h i s - - a n d sim- troi. Eliminating age rules similarly
receive the same premiunl for their i l a r - a c t i v i t y is not, strictly speaking, restricts prospective buyers. S u p e r i o r
shares or the option to vote whether greennlail. One wonders if any leg- Oil i n t r o d u c e d both strategies in 1983
to allow the takeover. Some critics ar- islation would prevent these behav- when Boone Pickens, CEO o f IVlesa
gue that companies often use the iors. Petroleum, began acct, mulating out-
greenmail tactic even when no ex- O t h e r r e c o m m e n d a t i o n s e n d o r s e d standing shares. S u p e r i o r Oil's ac-
plidt takeover attempt has been made by the SEC would (1) shorten the time tions w e r e n e v e r votecl oil by
or tile potential threat is negligible. involved in disclosure o f substantial stockholders, however, because such
From managenlent's viewpoint, how- holdings (that is, holdings in excess o f a vote is not required by law in Ne-
ever, no risk is negligible, especially five percent), and (2) restrict the abil- vada, where S u p e r i o r Oil is incorpo-
if it can be effectively r e d u c e d to zero ity of firms to buy back their own stock rated.
with s o m e o n e else's (stockholders') fl'om all shareholders at a price equal A second type o f sha,'k repelle,lt
funds. to or better than that o f f e r e d by an involves changing the corporation's
Greenmail tactics obviously have not acquiring firm. '~ W h e t h e r these pro- bylaws to make takeovers m o r e dif-
gone unnoticed. Tile SEC, s p u r r e d by posals will be enacted by Congress is ficuh. In many instances this involves
both stockholder suits and tile effects not clear. Even if t, ltinlately adopted, changing tim m m l b e r o f votes n e e d e d
o f buybacks on tile stock market, has these a n d o t h e r r e c o m m e n d a t i o n s to enact a m e r g e r or acquisition. In
end6rsed the r e c o m m e n d a t i o n o f the r e p r e s e n t only one step. O t h e r anti- S u p e r i o r Oil's case, the b o a r d
Advisory Committee on T e n d e r 01- takeover tactics continue to affect ad- a m e n d e d its bylaws in 1983 to make
fers. T h a t r e c o m m e n d a t i o n requires versely many stockholders of publicly- takeovers more difficuh. It increased
a firm to get stockholder approval be- held corporations. fi'om 20 percent to 50 percent the
fore r e p u r c h a s i n g stock at a premit, m proportion of outstanding shares
fi'om an investor who has held tile n e e d e d to call a meeting o f stock-
stock for less than two years. Tile en- holders at which a takeover might be
dorsement, o f course, does not have considered. Similarly, in a defensive
the effect o f law. According to J o h n move to fight o f f Odyssey Partners
H u b e r , director o f the SEC's Corpo- investment firm, T r a n s World Cor-
ration Finance Division, this proposal poration changed its bylaws, making
is an attempt to distinguish individ- it m o r e difficuh for shareholders to
uals taking advantage o f the system influence c o r p o r a t e policy.
fi'om those genuinely interested in a Some cmnpanies enact "superma-
takeover. jority" rules. Axia I n c o r p o r a t e d , lot
Frankly, such legislation or guide- example, p r o p o s e d that a four-fifths
lines, even if adopted, may be o f lim- Shark Repellent vote o f shares must a p p r o v e any take-
ited effectiveness. Disguised forms 6t" over by a n y o n e first acquiring 30 per-
g r e e n m a i l are p r o s p e r i n g v e r y he e u p h e n l i s n l f o r s h a r e - cent or more o f Axia's stock unless
nicely--even cleverly. Investor h-win
Jacobs, for example, recently held
some 7.7 percent o f Walt Disney Pro-
T h o l d e r p r o t e c t i v e ame,ad-
m e n t s - - s h a r k repellent--is,
6. For ft, rtlaer discussio,1 see "l-low Con-
the acquirer makes a single bid for all
the stock. According to Forbes, rules
such as this would make the firm al-
ductions. T h e Bass brothers, large most "takeover proof, unless man-
gress Plans to Cool Merger Fever," Busim,.~s Week,
stakeholders in Disney, "bought out" agement wanted it taken over. ''7 Union
J u n e 11, 1984: 44-45; "Corporate Raiders and
Jacobs at a price above the market Their Targets: Makingthe Fight Fairc,'" (note 7. P. S. IVleyer, "The Boile,'plate Defiznse,"
price. Technically, o f course, this was 5). Forbes, April 25, 1083: 40-,I I.

Oil C o m p a n y o f California proposed
a 75 percent supermajority rule in-
vocable by any holder of more than
20 percent o f the stock. E d m u n d
Kelly, a White & Case partner, de-
veloped a supermajority clause that
requires a controlling stockholder to
get a 95 percent favorable vote o f all
the s h a r e s o u t s t a n d i n g to clear a
merger.
P o i s o n Pills
hile s h a r k r e p e l l e n t s at-
W
tempt to keep raiders at
arm's length, "poison pills'"
warn would-be acquirers that, should
they swallow a target firm, they are
likely to be poisoned. In o t h e r worcls,
r a t h e r than taking steps to prohibit a
possible takeover, a c o m p a n y using a
poison pill tactic argues that such a
decision miglat place the suitor com-
pany in j e o p a r d y . F u r t h e r m o r e , the
target firm's m a n a g e m e n t is saying
that it would r a t h e r see the c o m p a n y
destroyed than taken over. This highly
controversial defensive strategy is o f
uncertain legality. In fact, it is cur-
rently being tested in several court
cases.
A recent incident at S u p e r i o r Oil
illustrates just how destructive poison
pill tactics can be. In 1983, the com-
pany u n d e r CEO Fred C. Ack,nan
created a poison pill: nine-tenths o f a
share o f convertible p r e f e r r e d stock
was issued for each share o f S u p e r i o r
c o m m o n . According to reports, once
an acquirer bought 35 percent o f the
firm, holders o f Superior's p r e f e r r e d
shares could cash them in to the com-
pany. T h e acquirer would pay at a
rate equal to the highest price paid
d u r i n g the p r e c e d i n g 12 m o n t h s .
Thus, redeeming the preferred would
Antitakeover Tactics: Management 42, Stockholders 0
drain S u p e r i o r totally o f cash. Such a
move would devastate both the ac-
q u i r e r and acquiree. T h e proposal
passed a board vote only after several
dissenting members resigned. One
week later, H o w a r d Keck, S u p e r i o r
Oil's largest stockholder and descen-
dant o f the company's f o u n d e r , an-
n o u n c e d a proxy fight to oppose the
poison pill, and Ackman was forced
to rescind the proposal. Nevertheless,
the incident illustrates the extent to
which some managers are willing to
fight takeover attempts.
%,.;~
• ::'"a.
"~~.~..+~...
. .
Golden Parachutes
p l e r h a p s the most lucrative
change in executive compen-
sation packages in recent years,
"golden parachutes" can be consid-
ered a special form o f shark repellent.
Parachutes are provisions in manage-
ment contracts that g u a r a n t e e top ex-
ecutives cash s e t t l e m e n t s if t h e i r
companies change hands. T h e s e set-
tlements, which are paid by the ac-
q u i r i n g firm, are b e c o m i n g quite
popular. According to a 1982 stucly
by Ward Howell International, 40
percent o f the U.S. corporations on
the F o r t u n e 1000 protect their top of-
ricers with e m p l o y m e n t contracts that
would provide payouts ranging fi'om
several hundrecl thousancl dollars to
m o r e than $5 million, in fact, in 70
percent o f the companies with such
contracts, the payouts exceed $1 mil-
lion, with 63 percent o f these com-
p a n i e s p r o t e c t i n g two o r m o r e
executives. 8
A r g u m e n t s have been made both
for and against golden parachutes.
T h o s e in favor note that, without
them, a firm cannot remain compet-
itive in attracting and hiring qualified
executives. This is t h o u g h t to be par-
ticularly true if a firm's stock is un-
d e r p r i c e d a n d t h e r e f o r e o p e n to
raiders. O t h e r supporters insist that
these contract provisions protect a top
m a n a g e r financially if the c o m p a n y
faces a takeover attempt. T h e argu-
ment is that golden parachutes allow
executives to analyze takeover bids
solely on the merits of the o f f e r with- 21
out concern for their own financial
security. Critics, on the other hand,
stress that it is the responsibility o f top
executives to protect the interests o f
stockholders; these managers should
not be o f f e r e d special rewards for
doing their job.
Still a n o t h e r a r g u m e n t , used by
supporters and critics alike, is that
parachutes help to discourage take-
overs. T h o s e in favor o f these special
e m p l o y m e n t agreements insist that
they make raiders rethink how much
they actually want the company. T h e
additional expenses tacked on by par-
achute provisions are consiclered a
major cleterrent to raiders who are
not serious. Critics, however, ask the
questions: "Should all hostile take-
overs be discouraged?" T h e issue is im-
p o r t a n t because p u t t i n g g o l d e n
parachutes in place suggests that an
antitakeover tactic would be imple-
m e n t e d without considering whether
the proposed acquisition would be
beneficial to stockholders.
As in the ca~e o f many corporate
controversies, weighing the pros and
cons o f golden parachutes is difficult.
Yet, as more and more provisions are
enacted, the benefits seem to decrease
rather than increase, and abuses seem
to p r o l i f e r a t e . Many g o l d e n para-
chutes, for example, do not cover just
one or two top executives. United
Technologies covers some 64 man-
agers; Kimberly Clark protects 80 ex-
ecutives; and Beneficial's agreements
include an astonishing 234 "key" ex-
8. "Survey of Employnmnt Contracts anti
'Golden Parachutes' Among the Fortune 1000,'"
Ward Howell International, Inc., September
27, 1982.
 ecutives. In addition, the provisions
often cover lengthy time periods.
Beneficial's a g r e e m e n t s e x t e n d f o r
three years, Brunswick's for five years
following a takeover. In 1981, AMF's
B o a r d o f Directors e n t e r e d into con-
tracts that protect ever), corporate vice
p r e s i d e n t until 1990 or until the ex-
e c u t i v e r e a c h e s a g e 65, w h i c h e v e r
comes first.
In m a n y instances (for example,
Brunswick C o r p o r a t i o n , Kennecott,
O u t b o a r d M a r i n e , Phillips P e t r o -
leum, St. J o e Minerals), the contract
provisions are good even if the ex-
22 ecutive quits voluntarily after his or
her firm is acquired. S o m e golden
p a r a c h u t e s (for e x a m p l e , B u r n u p &
Simms, Savin C o r p o r a t i o n ) are en-
acted even if ~he m a n a g e r stays on
t e m p o r a r i l y or draws a salary as a con-
sultant. "Double d i p p i n g " is also quite
c o m m o n if the displaced executive
finds a new j o b in the interim.
A n o t h e r i m p o r t a n t issue is that set-
tlements often are set at e x o r b i t a n t
rates. Beneficial's p r o p o s e d p a y m e n t s
exceed $40 million, and the contracts
o f both A m e r i c a n Family and G. K.
T e c h n o l o g i e s exceed $7 million for
the C E O alone. Ralph Bailey, chair-
m a n o f Conoco p r i o r to its acquisition
by DuPont, was a w a r d e d a g e n e r o u s
$3.5 million by the b o a r d o f directors,
and Bendix's William Agee received
$4 million when his firm was acquired
by Allied C o r p o r a t i o n . O n e critic
harshly noted that Agee received an
incredibly lucrative sum "for shooting
h i m s e l f in the f o o t a n d m o r t a l l y
w o u n d i n g his c o m p a n y with the ri-
cochet. ''9 Allied, in its acquisition o f
Garfinckel, Brooks Brothers, Miller &
Rhoads, had to pay the target firm's
top 12 officers triple their annual
c o m p e n s a t i o n (salary plus bonus) in
o n e cash p a y m e n t , r e g a r d l e s s o f
w h e t h e r these people quit or were
fired. C r u m and Forster's top three
officers are also protected at three
times their annual compensation.
S o m e golden p a r a c h u t e provisions
are enacted even if the target firm is
not taken over completely. T h e par-
achutes o f executives o f U N C Re-
9. J. Knight. "Golden Parachutes Reward
Corporate Failure," Washington Post, Septem-
ber 13, 1982: I1.
sources, for e x a m p l e , are enacted if
an acquirer purchases as little as 15
p e r c e n t o f the f i r m ' s o u t s t a n d i n g
shares. G u l f & Western's 20 p e r c e n t
stake in Mohasco was e n o u g h to trig-
ger the c o m p a n y ' s parachutes. Many
o t h e r c o m p a n i e s have set a limit o f 25
percent, including Cleveland Cliffs
I r o n and Phillips Petroleum. More-
over, in some firms " c h a n g e o f con-
trol" need not involve stock ownership
but may occur if the majority o f the
b o a r d changes.
All o f these issues call i,ato question
the e x t e n t to which g o l d e n p a r a -
chutes really serve stockholders' best
interests. But the most convincing ar-
g u m e n t against golden p a r a c h u t e s is
that m a n y o f these contract agree-
m e n t s are initiated a f t e r the fact. In
o t h e r words, m a n y c o m p a n i e s have
a d o p t e d golden p a r a c h u t e provisions
only after takeover threats are known.
Garfinckel, Brooks Brothers, Miller &
Rhoads, T r a n s World C o r p o r a t i o n ,
Conoco, Reliance Electric, and Bruns-
wick C o r p o r a t i o n are just a few o f the
m a n y examples. "~
T h i s retroactivity has inspired the
SEC's Advisory Committee on T e n d e r
Offers to m a k e two r e c o m m e n d a -
tions:
(1) T h a t the a d o p t i o n o f such con-
tracts be prohibited once a t e n d e r of-
fer actually has c o m m e n c e d ; and
(2) T h a t the contracts be described
in detail within p r o x y statements and
that they be the subject o f annual "ad-
visory" votes by stockholders.
Although these matters have bee,a
b r o u g h t up for Congressional inves-
tigation, Robert Profusek, a m e m b e r
o f the SEC's comnaittee, argues that a
r u l e p r o h i b i t i n g the a d o p t i o n o f
golden p a r a c h u t e s a f t e r a t e n d e r of-
fer has been m a d e is not the answer.
Such a restriction would cause corn-
10. For ftirther discussion see A. M. Mor-
risoq, "'Those Exect,tive Bailout Deals," For-
tune, December 13, 1982: 82-87; "Golde,1
Parachutes May (,o the Way of the Dodo." Busi-
ness Week, Jant, ary 9, 1984: 34; J. D. IVlcMillan
and G. S. Reisinger, "Takeover Protection for
Executives: The '(;olden Paracht, te,'" Compen-
sation Review. 1983, 1,34-43; D.J. McLat,ghli,1.
"On Golden Parachutes: Followiqg the Leader
and Other Fallacies." Directors & Boards. Sum-
mer 1982: 22-28; "'Surge in Executive (:on-
tracts," Dun's BusinessMonth. October 1981 : 86-
88.
panies to enact a rash o f golden par-
achutes immediately.
G o l d e n p a r a c h u t e s a r e likely to
continue to o p e n until the n u m e r o u s
suits already filed resolve their legal
status. A certain irony attends the use
o f p a r a c h u t e s as a d e f e n s e against
hostile takeover. I f it w e r e n ' t for the
effects o f golden paracht, tes on stock-
holders, the following s u m m a r y might
elicit a smile:
The irony of golden parachutes is that
th O, frequently, protect corporate hot shots
who fancy, themseh,es to be big risk takers.
Corporate takeovers are supposed to be the
Indianapoli.s 500 of the.['a.~t track wheel-
ing and dealing and takeover strategist.~
the Fl~,ing Wallendas of high finance.
But the Wallendas never used a safe(~,
net. In(Iv cars are not equipped with air-
bags. It doesn't take much of a hero to start
a takeover fight when the winner get.~ a
multibillion dollar business and the loser
falls into a $4 millim~ golde~ parachute. ~j
White Knights
A tactic often used to d e f e n d
a g a i n s t hostile t a k e o v e r s is
called "white k n i g h t s . ' In this
case, a c o m p a n y that is the object o f
a hostile takeover attempt finds a third
firm to act as a c h a m p i o n , a white
knight, to rescue it f r o m the clutches
o f a "black knight." Allied served as
Bendix's white knight against Martin
Marietta; D u P o n t c a m e to the rescue
to help Conoco fight off Seagram; and
S t a n d a r d Oil o f California acquired
11. "Golden Parachutes Reward Corporate
Failure" (note tl).

"Although white knights
are thought to be protectors,
many companies find that, after the
friendly takeover, their knights
are, in fact, more a
shade of grey."
G u l f in its escape from Mesa Petro-
leum.
Although white knights are thought
to be protectors, many companies find
that, after the friendly takeover, their
knights are, in fact, m o r e a shade o f
grey. Some critics a r g u e that the Iozs
o f managerial i n d e p e n d e n c e follow-
ing the white knight's actions actually
can be m o r e hazardous to employees
o f the acquired c o m p a n y than a hos-
tile takeover. According to one re-
port:
The zohite knight jumps into the fray
after a hostile bid has been made; thus it
has time for only a curso~ stuclr of the
takeover target. As a result.., there is a
greater likelihood that after the merger the
white knight wiUfind prob~l~ that it didn't
anticipate, v_,
Because frequently they are forced
to pay higher p r e m i u m s than their
hostile c o u n t e r p a r t s , white knights
may end up heavily in debt to finance
the acquisition. And while stockhold-
ers o f the target firm may benefit,
those of the parent company are more
likely to be hurt. F u r t h e r m o r e , cost-
cutting moves, such as trimming em-
ployment and divesting poorly per-
forming divisions, are often necessary.
In 1980, for example, Wheelabra-
tor Frye acquired Pullman at a price
double the rate o f f e r e d by hostile bid-
der M c D e r m o t t I n c o r p o r a t e d . T h e
day after the acquisition, Wheelabra-
tor Frye began dismissing employees,
and 1,500 Pullman workers were fired
by 1982. A similar situation o c c u r r e d
12. "Employees at Acquired Firms Find
White Knights Often Unfriendly," Wall Street
Joun~al, July 7, 1982: 23.
Antitakeover Tactics: Management 42, Stockholders 0
when white knight Sherwin-Williams
acquired Gray Drug Stores. In a third
case, within one year after Allegheny
International rescued Sunbeam Cor-
poration, 160 corporate staff mem-
bers had departed.
T h u s , while white knights are often
used to avoid hostile takebvers, there
is m o u n t i n g evidence that friendly re-
l a t i o n s h i p s d o not always e n s u e .
Moreover, this tactic often proves un-
favorable for both employees and
stockholders.
O t h e r Tactics
hile the tactics discussed
W thus far are a m o n g the
most popular, they are by
no means the only methods to dis-
suade would-be acquirers. Some tar-
get firms, for example, issue new
o f f e r i n g s o f stock at the first sign o f
a takeover attempt. This action can
be used either to place stock in friendly
hands or to dilute outstanding shares.
O t h e r t h r e a t e n e d firms buy back
their own stock. In the past, this ap-
proach was highly regarded, primar-
ily because executives used it when
their firm's stock was u n d e r v a l u e d in
terms o f book value and f u t u r e earn-
ings. By b u y i n g back o u t s t a n d i n g
shares, managers improved earnings
per share for the remaining investors.
T h e same purpose is served in most
c u r r e n t cases: Buybacks boost stock
prices and discourage raiders who ex-
ploit u n d e r v a l u e d stock.
According to a Buainess Week re-
port, in the first quarter of 1984 alone,
companies a n n o u n c e d a net buyback
o f their own shares totaling approx-
I
23
imately $60 billion, t:~ Included in the
list o f companies involved in buybacks
were Borden, Crane, J. P. Stevens,
Philip Morris, K-IVlart, and Standard
Oil o f Indiana. T e l e d y n e spent $1.7
billion for 42 percent o f its own stock.
Critics argue that buybacks have a
p r o f o u n d l y n e g a t i v e e f f e c t on the
c o m p a n y involved. By using cash to
reduce equity, the firm is liquidating
its assets. Money that otherwise might
be used to improve operations or ex-
pand into related areas is funneled
away. Consequently, although in the
short run it may thwart hostile take-
over attempts, in the long run this tac-
tic c o u l d r e s u l t in d a n g e r o u s
leveraging, which would be particu-
larly harmful in a slow economy with
high interest rates.
A n o t h e r defense tactic often used
to avoid hostile takeovers is to c h a n g e
the state o f i n c o r p o r a t i o n . T h e rules,
in particular those stipulating which
issues must be voted on by stockhold-
ers, vary from one state to another. It
is c o m m o n , therefore, for a firm to
limit the voice o f s t o c k h o l d e r s by
changing the state in which it is in-
corporated. This m e t h o d is particu-
larly popular when a company is faced
with a takeover bid that stockholders
might consider financially beneficial.
Because o f their lenient rules regard-
ing stockholder voting, Delaware and
Nevada are two corporate favorites.
Figgie International's 1983 move il-
lustrates this action. T h e m o r e strin-
gent bylaws enacted u n d e r Delaware
13. "Why Corporate Stock Buybacks Don't
Really Pay Off," Business Week, June 25, 1984:
33.
 "It is c o m m o n . . . for a firm
to limit the voice o f s t o c k h o l d e r s by
c h a n g i n g the state in w h i c h it is i n c o r p o r a t e d .
T h i s m e t h o d is particularly p o p u l a r w h e n a c o m p a n y
is faced with a t a k e o v e r bid that s t o c k h o l d e r s
m i g h t c o n s i d e r financially beneficial."

24

law w o u l d m a k e laostile t a k e o v e r s
m o r e difficult if not virtually impos-
sible. F u r t h e r m o r e , the new certifi-
cate o f incorporation authorized the
c o m p a n y to issue a class o f c o m m o n
stock having reduced voting rights and
allo~.,ed the firm to limit tile voting
rights o f substantial s t o c k h o l d e r s .
T h e s e s h a r e h o l d e r restrictions were
so severe that the company was forced
to switch from the New York Stock
E x c h a n g e to the o v e r - t h e - c o t , n t e r
market because it no longer met tile
NYSE regulations.
M a n a g e m e n t also changes the state
where a firm is incorporated to re-
strict aheration o f tile board. In one
exarilple, Gull" Corporation, prior to
its acquisition by Standard Oil o f Cal-
ifornia, won a p r o x y fight o v e r
w h e t h e r to r e i n c o r p o r a t e ill Dela-
ware. T h e move was an effort to
toughen the voting rules for directors
and make it h a r d e r tbr Boone Pick-
ens, CEO o f Mesa Petroleum, to gain
a board seat.
In addition to new issues, buybacks,
and reincorporation strategies, some
firms choose to alter d i v i d e n d poli-
cies. This tactic is often used to ell-
c o u r a g e s t o c k h o l d e r loyalty o r
institute a new reinvestnaent plan.
A n o t h e r approach to secure stock-
holder s u p p o r t is the introduction o f
c o m p e n s a t i o n p r o v i s i o n s for share-
h o l d e r s who do not t e n d e r their stock
to a raider.
Malay companies have tried to scare
away hostile pursuers by adopting an
active acquisition strategy. T o escape
hostile bidders in the 1960s, for ex-
ample, White Motor C o r p o r a t i o n was
advised to grow larger and t h e r e f o r e
unaffordable, in 1970 Marshall Field combination. Ill this instance, Madi-
was u r g e d to take on llUlnerous neon son Fund executives b o u g h t 25 per-
retailers ill an effort to prevent As- cent o f the firm's outstanding shares
sociated Dry Goods fi'om taking over. and disclosed that they might acquire
More recently, Walt Disney acquired a n o t h e r 5 percent in the future. In
A r v i d a C o r p o r a t i o n a n d Gibson response, Varian filed a lawsuit against
Greeting Cards in the attempt to de- the New York investment c o m p a n y ill
ter Saul Steinberg. T h e move was ill- late 1981, charging that the fund's
t e n d e d to increase the p r o p o r t i o n o f purchases and related disclosure were
Disney shares in fl-iendly hands. illegal. T h e st, it, the first step in a plan
Unfortunately, this strategy is often r e c o m m e n d e d by advisors G o l d m a n
unsuccessful, and firms can signifi- Sachs, served as a delay tactic though
cantly d a m a g e their financial posi- it was useless as a preventive llleasure.
tion. Marshall Field, for e x a m p l e , In the second step, Varian's manage-
became uncontrollable, and many o f ment was advised to seek protection
the firm's i n v e s t m e n t s p r o v e d un- from a white knight. While looking
sound. Walt Disney also has l o u n d it- for friendly parmers, the company's
self in troubled waters. Tile company's top executives continued to pursue the
two acquisitions, along with its buy- lawsuit while at tile same time nego-
back o f Steinberg's holdings, have tiating with Madison Fund. In acldi-
created a debt o f $900 million. This tion, the firm put together a new
brings Disney's debt-to-capitalization equity issue and d e b e n t u r e - c o n v e r -
ratio to 35 percent, a 75 percent in- sion plan in an e f f o r t to dilute Mad-
crease. ison Fund's interest to 20 percent.
It is i m p o r t a n t to note that these Although the takeover never took
antitakeover tactics are by no means place, partly because o f Varian's ac-
mutually exclusive. Malay can and tions a n d p a r t l y b e c a u s e M a d i s o n
have b e e n used s i n a u h a n e o u s l y . Fund itself became the object o f a
Moreover, in preparation for using takeover attempt by W a r n e r Com-
multiple measures, many firms adopt munications, this case illustrates mul-
delay tactics to get more time to ini- tiple antitakeover tactics.
tiate their plans. In its recent fight with T h e tactics we have described are
Odyssey Parmers, T r a n s World Cor- just a few o f the many methods nsed
poration filed suit against the com- by firms to thwart hostile takeover at-
pany as a delay tactic. Although some tempts. A 1980 study c o n d u c t e d by
c o m m e n t a t o r s believed that the suit the National Association o f Account-
was without substance, it gave the ants provides an extensive list o f the
company valuable time to enact golden frequently used strategies. T h e sur-
parachutes and to build stockholder vey, which examined 177 o f the 1,000
support. largest i n d u s t r i a l c o m p a n i e s , in-
T h e case o f Varian Associates illus- cluded tactics ranging from enhance-
trates how delay tactics and o t h e r an- m e n t o f e m p l o y e e a n d i n v e s t o r
t i t a k e o v e r actions can be used ill relations to revisions o f c o r p o r a t e by-

laws and capitalization changes. T h e
study offers several i m p o r t a n t obser-
vations. First, 80 percent o f the cor-
p o r a t i o n s s u r v e y e d have a n a l y z e d
their vulnerability to a takeover. Sec-
ond, most o f the companies have re-
organized the election or composition
of their boards of directors and
changed the stockholder voting re-
quirements to make acquisition m o r e
difficult. And third, a majority o f the
r e s p o n d i n g firms have intensified
their investor relations programs to
s t r e n g t h e n the loyalty o f e x i s t i n g
s t o c k h o l d e r s . M o r e o v e r , the s t u d y
highlights the fact that firms often rely
on multiple proactive strategies to
limit f u t u r e hostile t a k e o v e r at-
tempts. ~~
14. '"takeovers: A St, rvey of Corporate De-
fense Strategies," Mergers & Acquisition.~, 15,
1980: 21-35.
Antitakeover Tactics: Management 42, Stockholders 0
h a r k r e p e l l e n t s , p o i s o n pills, a n t i t a k e o v e r issues. Most analysts,
S greenmail, white knights, and
golden parachutes are a m o n g
the most troubling antitakeover tac-
however, are not optimistic about the
f u t u r e o f these bills. T h e battle con-
tinues. In a single month, the Wall
tics. It seems clear that none is in the Street Journal r e p o r t e d that over two
interest of" the stockholder. T h e an- dozen companies have passed anti-
titakeover game appears t h o r o u g h l y t a k e o v e r m e a s u r e s . Most o f these
one-sided. Management fights fiercely companies state that they are una-
to d e f e n d against the takeover, but ware o f any current, direct takeover
there is very little the stockholder can threat. Evidently, they want to be pre-
do to p r e v e n t these defenses. T h e r e - p a r e d - j u s t in case. As bad as the cur-
fore, it has been suggested that the rent "score" appears, there seems tittle
"score" in the antitakeover game is chance that the gap will close. [ ]
M a n a g e m e n t 42, S t o c k h o l d e r s 0.
Some help, however, may be o,1 the
way. 25
T h e courts and the SEC are begin-
ning to take a m o r e active role in these
issues and are in the midst o f impor-
tant decisions. Congress also has sev-
eral bills before it that address some