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

A primer on hostile takeover buzzwords by Kok Chee Kheong



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.


What follows is a short write-up on some interesting expressions which came into being during this period.




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.




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.




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.




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.




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.




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.




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.




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 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.




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.




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.




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.




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.




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).




Like the Latin language, the jargon associated with hostile take-overs may be a thing of the past in this present age where corporations prefer friendly mergers to hostile bids.


Just like fashion which comes full circle after a period of time, hostile take-overs and the buzzwords associated with them may become fashionable again. Perhaps the "Pac-Man Defence" will be up-dated to "Pac-Man Defence Version 2.0" in the next wave of hostile take-overs. Who knows, some innovative lawyer or investment banker may even come up with the "Viagra" Defence.


Come to think of it, I may have been presumptuous to assume that my young colleague was referring to the poison pill defence. Perhaps she was referring to real poison pills, like those which KGB agents were supposed to have kept hidden in their shirt sleeves or elsewhere during the Cold War. I'd better end here - have to lock-up the bottle of aspirins that is lying on my desk.



KOK CHEE KHEONG ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )


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