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Definition: Clandestine Takeover
Clandestine Takeover or also known as Creeping Takeover happens when an acquirer buys up to 5% stake in a company without any prior permission of the company’s board. After acquiring a 5% stake the acquirer has to inform the stock exchange if it wishes to purchase more stake.
A clandestine takeover is generally a preclude to hostile takeover where the acquirer wants to gain control of the company. A hostile takeover can be done in two ways which are through a tender offer or by a proxy fight. In a tender offer a premium price is given to the shareholders to buy their shares so as the acquirer can get majority of the shares to become the largest shareholder of the company. In a proxy battle the acquirer tries to persuade existing shareholders to vote out current management so that the new management would agree to a takeover.
There are a lot of strategies to defend against hostile takeover and some of the important ones are poison pill, golden parachute, pac-man defence, crown jewels defence etc.
• Poison Pill: - In this strategy the target company tries to make its stock less appealing to the acquirer by using flip in or flip over strategy. In flip in existing shareholders of the target company buy shares from its existing shareholders at a discount which the acquirer cannot do. In flip over strategy the shareholders retain an option to buy the shares in the acquiring company at a discounted price after the merger or acquisition by including a rights plan in the bylaws of the target company permitting them to do so.
• Golden parachute: - In this strategy huge benefits are given to top executives of the firm in case company is involved in a takeover battle and these employees get terminated by the acquiring company once acquisition is done. This makes takeover unattractive to the acquiring company if they wish to replace executives after the takeover battle.
• Pac-Man Defence: - In this strategy the target company turns the table on the acquiring company by dipping into its cash reserves and trying to buy the acquiring company to scare them off. The term comes from the Pac-Man video game where Pac-Man can eat the ghosts that are chasing them after he boosts himself with a power pellet.
• Crown Jewel Defence: - Crown jewels are the most essential and valuable units of the corporation. In this strategy the target company includes clauses in its bylaws compelling the sale of the crown jewels in case a hostile takeover is successful.