Question

What are three types of antitakeover amendments, and how do they work to defend a target from an unwelcome takeover?

What effect of the passage of antitakeover amendments on stock price?

Answer 1

Antitakeover amendments and how do they work:

• Pac-Man defence method: calls for a retaliatory takeover bid aimed at the company attempting to make the acquisition
• Macaroni defence method: issuing of numerous bonds that must be bought at an exorbitant premium in the event of an acquisition of the company
• The Poison Pill: making the stock unfavourable for the corporate raider, who has given the hostile bid

Effects on stock price:

• enables the existing shareholders to buy additional shares at a high discount rate
• It can also offer the existing shareholders of a company to buy additional shares of a new company
• a special clause that enables preferred stock to convert into the common stock after the takeover, hence increasing the cost of merger
• Flexibility to existing shareholders to convert their debts into cash at a pre-determined price