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Thursday, October 27, 2005

Hedge Funds and Takeover Defenses

One of the things I always enjoy is the way the players in any game adjust to each other (and adjust to each others' adjustments, and so on...). Here's the latest example.

Finance theory says that the takeover market can help discipline underperforming managers: If the managers do a bad job they'll drive the value of the company down. If the value of the firm goes low enough, another firm (or investor) can buy the firm "on the cheap", fire the managerial turkeys, and reap the benefits of a firm that has gone up in value. However, underperforming managers realize this and often take steps to thwart this process either by enacting anti-takeover defenses before the fact (the so-called "poison pills) or by maneuvering to eliminate a takeover bid once it occurs.

Here's the latest installment of this continuing saga.

As hedge funds have grown in size, they've become an increasingly more important factor in the takeover market - they have money, sophisticated investors, and they're willing to throw their weight around. Not surprisingly, managers and boards don't like this trend, So, they've come up with some new anti-takeover tactics to thwart the threat to their continued control posed by the funds. Business week has an amusing (at least to me) article on this phenomenon titled "Take Your Best Shot, Punk". Here's one of the better anti-takeover strategies they highlight:
Hedge funds are usually savvy operators, but sometimes even they get outmaneuvered by a simple tactic. New York-based Pembridge Capital Management wanted change at iconic trading-card outfit Topps Co. and was set to nominate three directors. Before its annual meeting on June 30, Topps appeared to meet one of Pembridge's key demands when it hired investment bank Lehman Brothers (LEH ) to explore a sale of its candy unit.

So the board asked Pembridge to withdraw its nominees, which it did. Then, on Sept. 12, the company announced that it wasn't selling the candy business after all. Pembridge had fallen victim to one of the newest defenses thrown up by companies desperate to fight off tough demands or a takeover -- a ploy called the head fake. Topps did not return phone calls asking for comment.
There are a number of other clever managerial moves highlighted in the article. Click here for the whole thing.

It might be interesting to do an academic study on how the presence of a hedge fund investor effects takeover outcomes. Just off the top of my not-nearly caffeinated enough head, I'd guess that having one on board would make the takeover more likely to go through, and at a lower takeover premium.




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