What it means
A hostile takeover happens when a buyer goes directly to shareholders, or tries to replace the board, without the agreement of the target company's management. Faced with this, a target often needs outside help, because the tactics are complex and the timetable is short.
Killer bees are the people brought in to provide that help. Their toolkit includes legal advice, valuation work and strategy.
A common defence is the poison pill, which makes the target less attractive by letting existing shareholders buy extra shares cheaply if a bidder crosses an ownership threshold. Others include seeking a friendly rival buyer, called a white knight, or selling off the most attractive assets.
Proxy solicitors, who contact shareholders to win their votes, are among the most important members of the team. If the bidder is trying to replace directors, the outcome often depends on how many shareholders support the board.
The advisers help to explain the case and to counter claims made by the other side. The use of killer bees raises questions about the interests of the people involved.
Directors have a duty to act in the interests of shareholders, which may include getting the best price, rather than simply keeping their own jobs. Advisers are normally paid large fees, sometimes with a bonus if the bid fails, so shareholders should look at who gains from each outcome.
In a successful defence, the bid may be withdrawn or increased, and either result can benefit shareholders. In an unsuccessful one, the company has spent significant sums on fees and may still be taken over.
Costs are usually charged to the company and shown in its accounts as expenses. For a non-finance reader, the term is useful for understanding news stories about bids.
When a company announces that it has hired advisers and adopted defensive measures, it is calling in its killer bees. It does not mean the bid will fail.
In practice
Real-world examples.
Example
A mid-sized engineering company receives an unsolicited offer from a larger rival. The board hires an investment bank, a law firm and a proxy solicitor to review the offer and advise shareholders. The bank concludes that the offer undervalues the business, and the board recommends rejection.
Example
A retail chain adopts a poison pill after a competitor builds a stake just under the disclosure threshold. Its lawyers design the plan and explain it to investors. The bidder pauses to reconsider its approach and eventually negotiates directly with the board.
Example
A software firm's board identifies a friendly company that might make a better offer. Its advisers contact that company, which then submits a higher bid. Shareholders end up with a better price than the original bidder had offered, and the original bidder moves on to another target.
Case study
Seen in the real world.
Falcon Ridge Components is an illustrative, fictional manufacturer that received a hostile offer valued at $40 a share from a larger competitor. The board believed the business was worth at least $48 a share, and it assembled a team of advisers within a week.
The advisers produced a valuation report, advised on a poison pill and contacted shareholders to explain the board's view. The bidder raised its offer to $46 and then walked away after the pill made a further increase too expensive.
The company spent $3,000,000 on adviser fees, but shareholders benefited because the share price held near $44 afterwards, above the original offer. The illustrative lesson was that the defence should be judged by what it achieves for shareholders, not simply by whether the bidder was kept out. The board also published a clear account of the fees paid and the work done, so that shareholders could see the cost of the defence against the improvement in price. Several investors later said that this openness made them more willing to back the board's judgement.
Watch out
Common mistakes.
- Assuming that hiring advisers means a company will refuse every bid, when a good defence often aims to secure a higher price.
- Ignoring the conflicts of interest, since advisers may earn bonuses if the bid fails and directors may want to protect their positions.
- Forgetting the cost, as defence fees can reach millions of dollars and are borne by the company and therefore by shareholders.
Questions
People also ask.
Who are killer bees?
They are the investment bankers, lawyers, public relations specialists and proxy solicitors hired by a target to resist an unwanted takeover bid.
What is a poison pill?
It is a defensive device that allows existing shareholders to buy extra shares at a discount if a bidder acquires more than a set percentage, making the takeover far more expensive.
Do killer bees always succeed?
No, some bids go ahead despite the defence, and in others the best result for shareholders is a higher offer rather than a failed bid.
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