Of Bimbos, Black Swans and Ex-Dates

Kok Chee Keong wrote two interesting articles about coirporate buzzwords on the website of Skrine:

"A Blast from the Past: Of Poison Pills and Pac-Man Defences"

"Of Bimbos, Black Swans, Ex-Dates, Etc"

C.K. Kok writes:
The impetus for this article came about when a young colleague in our Firm enquired, "What is a poison pill?"
 
The question brought my thoughts back to the mid-1970s and the 1980s – not to the pulsating rhythms and flashing strobe-lights of the disco-era but rather, to the cut and thrust action of the golden age of hostile take-overs.
 
The take-over of Electric Storage Battery Co. by International Nickel Company in 1974 ushered in one and a half-decades of hostile take-overs. During this period, new tactics to prosecute and defend hostile take-overs were introduced and refined and phrases like "poison pills", "Pac-Man Defence", "risk arbitrage", "greenmail" and "leveraged buy-outs" became part of the English language.


SLEEPING BEAUTY
A "Sleeping Beauty" is a company which is an attractive target but has yet to become the subject of a take-over bid. Typically such a company would have undervalued assets or large reserves of cash.

A company may also become an attractive proposition for a take-over when its management is unable to realise the company's full potential or its share price lags behind in the stock market.


"IN PLAY"
When a take-over bid is made for a Sleeping Beauty, it would be described in take-over parlance as being 'in play'.

A recent example of a company which came into play was Yahoo!. Yahoo!'s stock price had lagged in a bull market and it had for several years, lost market share to Google in search traffic and on-line advertising revenue. These factors, plus Microsoft's need to boost MSN's user base and advertising revenues in its battle with Google for control of the internet made Yahoo! the ideal candidate for a take-over.

An offer was extended by Microsoft, but resisted by the Yahoo! board. Despite several months of posturing by both sides, the highly anticipated hostile take-over failed to materialise and the Redmond-based software giant withdrew its offer.

A company may also come into play as a result of the break-up of the controlling block of its shares. This may arise due to disputes between the shareholders, particularly in family-controlled companies, or when shareholders no longer share the same vision of the company's future or where one or more of the controlling shareholders decide to dispose of their stake in the company.

An example of a break-up of a controlling block of shares which led to the take-over of a company is that of Southern Bank Berhad. The bank had, for a long time, been jointly-controlled by two groups of shareholders, one led by Tan Sri Dato' Tan Teong Hean and the other, by DYMM Sultan Sharafuddin Idris Shah and Dato' Syed Mohd Yusof. When the CIMB Group made an unsolicited take-over offer for the bank, the latter group decided to sell their shares, leaving Tan Sri Dato' Tan's group with insufficient support to stave-off CIMB's bid.


RISK ARBITRAGE
When a company becomes the subject of a take-over bid, it is not unusual for arbitrage traders to acquire significant blocks of shares in the target company with a view of profiting from an increase in the price of the target company's shares, especially if competing bids are received for the target company's shares.

Arbitrage traders may also attempt to profiteer from a take-over bid by short-selling the predator's shares if they expect its share price to fall due to unfavourable market response, or acquiring significant blocks of such shares if they expect the price to be driven up by a favourable market response to the take-over bid.

The afore-mentioned practices by arbitrage traders is known as risk arbitrage and differs from the traditional arbitrage practice where arbitrageurs profit from trading in shares by taking advantage of differences in the price of a company's shares on the different stock-markets on which it is listed.

One of the prominent risk arbitrage traders was Ivan Boesky who reportedly amassed a fortune of about US$200 million by arbitraging on hostile take-overs. Boesky ultimately fell from grace upon his conviction for insider trading and was barred for life from working in the securities business.


GREENMAIL
In the golden age of hostile take-overs, it was not uncommon for corporate raiders, such as Carl Icahn, T Boone Pickens and James Goldsmith, to acquire significant stakes in a company to create a threat that a hostile take-over was imminent. To neutralise this threat, the target company would buy-back the shares of the raider at a substantial premium against an undertaking by the latter to refrain from acquiring further shares in the target company for a specified period. This practice by corporate raiders came to be known as "greenmail."

An illustration as to how profitable greenmailing can be, James Goldsmith and his cohorts made a profit of about US$90 million in their raid of The Goodyear Tire & Rubber Company which bought-back their 11.5% stake in the company at a substantial premium to eliminate the threat of a hostile bid.


ASSET STRIPPER
A corporate raider who acquires a company and disposes of all or some of the latter's assets is known as an "asset stripper".

The ideal target for asset stripping is a company whose break-up value exceeds its combined value. In an extreme situation, a raider may acquire a target company with the view of liquidating the entire company to make a profit from the disposal of the various businesses carried on by the target company.

Asset stripping is also a means by which a raider reduces its cost of acquiring the target company.

Ron Perelman's Pantry Pride which acquired Revlon for its cosmetics business in a hostile take-over in 1985, sold Revlon's prescription drugs division for US$690 million to reduce its cost of acquisition.


WHITE KNIGHT
A white knight is an individual or company whose help is sought by a target company to fight-off a hostile take-over bid by making a competing bid which is welcomed by the target company.


THE PAC-MAN
One of the most endearing first generation computer games was the Pac-Man. It involved an adorable yellow character, the Pac-Man, being chased by ghost-like characters. The objective of the game is for the Pac-Man to gobble up power pills located at various parts of the screen which transform him from being the hunted to the hunter.

The Pac-Man Defence, which takes its name from the afore-mentioned game, is a defence strategy whereby the target company defends itself against the predator by launching a take-over offer against the predator.


BENDIX
In 1982, Bendix Corporation made a hostile bid for Martin Marietta, an arms manufacturer. To counter the unwelcomed bid, Martin Marietta, together with United Technologies, made counter-tenders to acquire Bendix and to split its assets. With the tables turned on it, Bendix rescued itself from the clutches of Martin Marietta and United Technologies by getting Allied Chemical to acquire it.

The Bendix case is interesting as the target company, Martin Marietta, aided by United Technologies, successfully deployed the Pac-Man Defence to fend-off a hostile bid and the predator, Bendix, had to resort to a White Knight to save itself from the target company's counter-bid.


THE GULF WAR
The Gray Investor Group (GIG), a syndicate led by renown corporate raider, T Boone Pickens, acquired 22 million shares in Gulf Oil. GIG then made an offer to acquire 50% of the issued shares of Gulf. Gulf sought white knights to fend-off GIG's hostile bid.

A bidding war ensued between three white knights, with Standard Oil of California (Socal) (now known as Chevron) emerging triumphant and Gulf losing its status as an independent company.

Perhaps the biggest winner of the Gulf War was GIG which made a profit of US$750 million from the raid, with Pickens' Mesa Petroleum netting almost two-thirds of that amount.

The Gulf War illustrates that apart from forcing the target company to buy-back its shares at a premium, greenmailers can also profit by forcing the target into the hands of a white knight.


SHARK REPELLENT
A "shark repellent" describes any measure adopted by a company to discourage unwelcomed take-over bids. They include amending the company's by-laws to specify a high threshold for shareholders to approve a merger and to introduce classified boards, that is, an arrangement for directors to retire at different times.

The above-mentioned measures are ineffective for public companies under Malaysian law. A shareholder does not require the approval of a company's shareholders in general meeting to dispose of his shares. Directors of a public company may be removed by simple majority vote of the shareholders without cause before the expiry of their term of office.


POISON PILL
The poison pill, a form of "shark repellent", was conceived by one of the foremost take-over defence lawyers, Marty Lipton of Wachtell, Lipton, Rosen, Katz & Kern as a means to deter hostile take-over offers.

There are principally two types of poison pills. One is a 'flip-over' provision which gives the shareholders of a target company the right to acquire shares in the acquiror after the completion of the merger of the two companies.

The other is a 'flip-in' provision which gives the shareholders of a target company (other than the acquiror) the right to acquire shares in the target company at a discount or by way of a dividend. The 'flip-in' pill, which may be activated irrespective of whether the acquiror and the target company are merged, dilutes the shareholding of the predator in the target company and makes it more costly to acquire control of the target.

After several cases where the American courts declined to issue a definitive ruling on the validity of poison pills, the Delaware Supreme Court in Moran v Household International Inc, 500 A.2d 1346 (Del. 1985) upheld the validity of the poison pill.


SCORCHED EARTH DEFENCE
A "scorched-earth defence" is a military strategy adopted by a retreating army to destroy crops, land and trees to reduce supplies available to the advancing enemy. The scorched earth policy was successfully deployed by the Russians to frustrate Napoleon's invasion in 1812 and Hitler's army in 1942.

In corporate parlance, a "scorched earth defence" is an anti-take-over strategy whereby a company adopts various measures to make itself less attractive as a target for a hostile take-over.

The measures which can be adopted by a company include disposing of its prized assets, reducing its cash reserves by making huge dividend payouts, implementing share buy-backs or acquiring other assets and increasing its level of borrowings significantly.

As scorched earth defences may be detrimental to financial well-being of the company itself, such defences should not be resorted to except in the most desperate circumstances.


LEVERAGED BUY-OUTS
A "leveraged buy-out", also called an "LBO", is a method of acquiring a company which is funded by a high proportion of borrowings. Although this method of financing is not restricted to hostile take-overs, it gained popularity during this period.

Common practices associated with an LBO are the pledging of the target company's assets as collateral for the acquiror's borrowings and the use of its cash-flow to fund the principal and interest payments on the debt. Both these practices are prohibited under Malaysian law.


JUNK BONDS
With the growing popularity of LBOs, corporate raiders filled their war-chests to undertake hostile bids by borrowing in the capital markets through the use of "junk bonds".

In essence, "junk bonds" are high-yield bonds that have low credit ratings, i.e. bonds that pay a high rate of interest but have greater risk of default.

Drexel Burnham Lambert, spearheaded by Michael Milken, was the largest purveyor of junk bonds during the golden age of hostile take-overs. Both Drexel and Milken were subsequently disgraced by their involvement in securities fraud. Drexel declared bankruptcy and Milken was fined a whopping US$200 million and sentenced to a term of imprisonment of up to 10 years (of which he served only 22 months before being released).


BIMBO
According to the Shorter Oxford English Dictionary (5th Edition), a "bimbo" is an attractive but unintelligent woman.

In the world of finance, the acronym "BIMBO" stands for "Buy In Management Buy Out" where existing shareholders of a company are bought-out by a consortium comprising outside investors who "buy in" and existing management who undertake a "management buy out".

To this day, the finance wizards at Harvard, Wharton and INSEAD and top-notch investment bankers on Wall Street have yet to find an appropriate use for the expression, "bimbo", which according to the above-referred dictionary, describes an attractive but unintelligent man. Perhaps the jocks of the NFL and the EPL can provide an 'assist' here, duh?


BLACK SWAN
Black Swan is the name of the movie in which Natalie Portman won the Academy Award for Best Actress in 2010 for her brilliant portrayal of the psychological meltdown of a prima ballerina (the principal ballerina in a ballet company).

In corporate-speak, a "Black Swan" describes a rare event of extreme impact which lies outside the realm of predictability. The appearance of a "Black Swan" usually wreaks havoc in the financial markets. The term was coined by Professor Nassim Nicholas Taleb, a professor at Oxford University and the Polytechnic Institute of New York University, in his book "The Black Swan".


BLITZKRIEG TENDER OFFER
In military parlance, "blitzkrieg" means "lightning war" in German. This strategy was deployed with great success at the outbreak of World War II when Germany, relying on heavy bombardment by its aeroplanes, artillery and tanks, conquered most of Western Europe with ease and in quick time.

A "blitzkrieg tender offer" is similar to the military strategy insofar as its objective is to secure success quickly. It differs radically from its military counterpart in that unlike the latter which creates "shock and awe", a "blitzkrieg tender offer" is a take-over offer which is so attractive that it receives minimal or no objections from the shareholders of the target company.

The reclusive Malaysian billionaire, T. Ananda Krishnan, has deployed this tactic with great success in his privatisation of Maxis Communications Berhad, ASTRO All Asia Networks plc and Tanjung plc by offering substantial premiums of 20%, 23.6% and 21.9% respectively over the last-traded price of the shares of those companies before the issue of the respective take-over notices. Each offer attracted more than 90% acceptances, thereby enabling the offeror to acquire the remaining shares of each company using the compulsory acquisition provisions under the relevant securities law.


BREAK-UP FEE
In the world of mergers and acquisitions, a "break-up fee" is a fee which a purchaser pays to a target company or the seller if the purchaser withdraws from the transaction. Although less common in practice, this term can also apply to a fee that is payable by a seller or the target company to a purchaser if seller or the target company withdraws from the sale. Such payment is to compensate the relevant party for time and resources spent on the transaction and for loss of opportunity.

The payment of break-up fees is a common practice in international transactions. On 21 March 2011, Bloomberg reported that AT&T agreed to pay T-Mobile USA a break-up fee of US$3 billion if it does not proceed with the acquisition of the latter. It was also reported in overheard@wsj.com that AOL and Pfizer had each agreed to pay break-up fees in excess of US$4 billion in their purchase of Time-Warner and Wyeth. The AOL-Time-Warner and the Pfizer-Wyeth transactions, valued at US$160 billion and US$68 billion, were completed in 1980 and 2009 respectively.

Although break-up fees are presently not a common practice in the Malaysian merger and acquisition scene, the practice may find its way to our shores in due time.

On 6 March 2011, asiaone.com.sg reported that Ms Tan, a waitress, demanded S$30,000 from her former boyfriend, Mr Du, as a break-up fee when he ended their 6-year relationship. Ms Tan alleged that Mr Du had signed an agreement with her and a certain Mr Ng, her other boyfriend (yes, life gets complicated in a triangular relationship) to pay her that sum and a further sum of S$15,000 to Mr Ng.

The online news portal further reported that Ms Ng has since obtained legal advice that the agreement was not legally binding. A case of life imitating art?


DAWN RAID
The expression "dawn raid" derives its origin from the military strategy, "pre-dawn raid", where attacks are launched before daybreak when the enemy's level of battle-readiness is lower.

In a hostile take-over, a dawn raid occurs when a corporate raider acquires large blocks of securities in the target company as soon as trading commences on the stock market.

One of the most famous "dawn raids" occurred on 8 September 1981 when Permodalan Nasional Berhad (PNB), then led by Tan Sri Khalid Ibrahim (now Mentri Besar of Selangor) acquired approximately 26% of the ordinary share capital of The Guthrie Corporation Limited on the London Stock Exchange within 2 hours of trading to increase its holding in that company to 51%. PNB eventually acquired the remaining shares in Guthrie.


EX-DATE
In the trading of securities, an "ex-date" refers to a date on and after which a security is traded without the entitlement to a right, distribution or dividend which has been announced. On Bursa Malaysia, the ex-date usually falls 3 market days before the entitlement date.

In the larger scheme of life, the prefix "ex" connotes a relationship which once existed, but no longer. For example, an ex-spouse refers to a person's former husband or wife, and an ex-girlfriend is a person's former girlfriend. By extending the same logic, an "ex-date" would be someone whom a person once dated but no longer does.


FRONT RUNNING
In horse-racing, "front running" describes a horse whose style is to race from the front of the pack as soon as the race starts.

In corporate parlance, front running is the practice where a market intermediary, such as a broker, acquires a particular security before his company recommends the same security to its clients.

On 1 April 2011, The Australian reported that Oswyn de Silva, a Malaysian fund manager with Macquarie Bank in Sydney, was sentenced to 2½ years imprisonment for this form of insider trading. De Silva had purchased certain stocks using insider knowledge that a Macquarie Group company would be purchasing these stocks to align its investments with its investment model and subsequently sold them to the Macquarie Group company for a profit.


GO-SHOP PERIOD
A "go-shop period" is not a time when one allows his wife to go on an unbridled shopping spree during the Grand Prix Sale, Mid-Year Sale, Year-End Sale, Hari Raya Sale, Chinese New Year Sale, Deepavali Sale, Christmas Sale or a host of other sales that seem to be perpetually on-going in Malaysia.

In mergers and acquisitions, a "go-shop period" is a time period during which a company that is being sold is permitted to seek out competing offers even though it has agreed on the principal terms of the sale with a prospective buyer. This period enables the directors of the target company to fulfil their fiduciary duty to obtain the best possible price for the sale.

In November 2010, Del Monte Foods Company entered into a merger agreement with a group of investors led by Kohlberg Kravis and Roberts & Co, L.P. which gave Del Monte the right to solicit alternative bids from third parties for a period of 45 days. The "go-shop period" ended on 8 January 2011 without the company finding any alternative bidders. The merger was completed on 8 March 2011.


RUSSIAN ROULETTE
The deadly game of Russian Roulette probably came to attention of the public in the 1978 multiple Academy Award (including Best Picture) winning movie "Deer Hunter" where the American POWs were forced by their Vietcong captors to play a deadly game where they took turns to spin the cylindrical ammunition chamber of a revolver which contained one bullet before placing the gun against their temples and pulling the trigger. Extreme sports at its ultimate!

In legal terms, a "Russian Roulette" is a form of dead-lock breaking mechanism in a shareholders' agreement whereby a party, A, offers to purchase all the shares of the other party, B, and alternatively, at the election of B, to sell all of A's shares to B, in each case, at the price set by A. B must elect, within a specified time period, to buy A's shares or sell its shares to A. If B fails to respond by the expiry of the specified period, B is deemed to have agreed to sell its shares to A.


SIDECAR INVESTMENT
The expression "sidecar" refers to a motorcycle sidecar. The pillion in the sidecar entrusts his safety to the skills of the rider of the motorcycle.

A sidecar investment strategy is one where an investor allows another investor to control the manner in which the former's funds are to be invested. In other words, the first investor relies on the investment expertise of the other.

On 25 March 2011, StarBiz reported that a number of French investors in LuxAlpha Sicav-American Selection Fund sued Swiss bank, UBS, in Paris for failing to disclose in the prospectus that the fund's assets were to be invested through Bernard Maddoff's firm.

While it remains to be seen whether the suit will be successful, it appears that UBS had adopted a sidecar investment strategy by entrusting Lux-Alpha Fund's assets in the care of the now disgraced former NASDAQ Chairman and Ponzi-scheme operator extraordinaire.


TAILGATING
In everyday life, tailgating is an incident that you encounter when a Proton Satria or Perodua Kancil with its HID-lights blazing on high-beam races right up to the rear bumper of your BMW as you cruise along on the PLUS Highway at a leisurely speed of 180 kmh.

In corporate-speak, tailgating is the practice where a market intermediary buys or sells a security for its own account immediately after carrying out the same transaction on behalf of its client. Unlike front running, tailgating may not be illegal unless the intermediary is in possession of insider information or is a tippee (one who knowingly receive a tip from an insider) when he executes the trade for his own account.


TEXAS SHOOT-OUT
A "Texas Shoot-Out" is not a B-Grade direct-to-video remake of the "Gunfight at the O.K. Corral". It is another form of dead-lock breaking mechanism in a shareholders' agreement.

In a "Texas Shoot-Out", a party, A, offers to purchase all the shares of the other party, B, at a price set by A. B must, within a specified period, indicate whether he will accepts A's offer or that he will purchase all of A's shares at a higher price. If B indicates that he wishes to purchase A's shares, a sealed bidding process will ensue and the shares will be sold to the party who sets the highest price.

Dead-lock resolution clauses like a "Texas Shoot-Out" and "Russian Roulette" are usually provisions of last resort when the parties wish to end their relationship as shareholders in a joint-venture company.