A New Era for Raiders

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Companies are stockpiling cash, stock market valuations are down, and private equity investors are sitting on piles of uninvested capital. Clearly, the economic conditions are right for a new era of corporate takeovers. This time, though, target companies’ boards may have a tougher time fending off corporate raiders. That’s because the defensive game plan that worked in the 1990s and 2000s is unlikely to work today. The classic antiraider tactic, the “poison pill,” is disappearing from companies’ arsenals. And my research with Steven Herscovici and Brian Barbetta of the Analysis Group casts doubt on another line of defense: states’ antitakeover laws.

Poison pills dramatically raise the cost of unwanted acquisitions, giving target company directors the ability to veto offers from hostile bidders, even if shareholders feel otherwise. But now, after years of shareholder pressure to do away with poison pills, only 28% of S&P 1500 companies have them at the ready, down from 54% in 2005.

Even without poison pills, most U.S. companies have some measure of protection from corporate raiders through state laws. By far the most important of these is Section 203 of the corporate code of Delaware, where more than half of U.S. public companies are incorporated. Section 203 delays a hostile takeover by three years unless the bidder buys 85% of the target’s shares in a single tender offer. No bidder wants to wait three years—an eternity in the M&A world—before gaining full control of the target. Instead, bidders usually negotiate a friendly deal with the target board, which then waives Section 203.

But our research shows that a strong case can be made for invalidating Section 203. When Section 203 was enacted, in 1988, three federal courts upheld it against constitutional challenges on the grounds that the 85% escape hatch gave bidders a “meaningful opportunity for success.” However, not a single bidder has been able to make use of the 85% “out” in the past 19 years, which suggests that the statute does not give bidders a meaningful opportunity for success. Furthermore, the original data that the federal courts relied on in making their constitutional assessment were seriously flawed. The bottom line: The empirical proposition that the federal courts used to uphold Section 203 is no longer valid—in fact, it never was.

That means Section 203 is in play. And if it were to be overturned, similar statutes in 32 other states—which along with Delaware collectively cover 92% of all U.S. corporations—could be called into question.

Companies are taking notice: When convenience-store giant Couche-Tard made its $1.9 billion hostile bid for Casey’s General Stores earlier this year, for example, it cited our study as the basis for its challenge to Iowa’s antitakeover statute.

The days when companies could rely on a poison pill and antitakeover statutes to “just say no” to hostile bidders are long gone. The next M&A era will most likely be characterized by fewer artificial barriers to takeovers. Targets will attempt to control the deal process—but in the end, they will not be able to block an offer that their shareholders want to accept.


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