Targeted buybacks can prevent hostile takeovers by buying enough shares to regain control of the company and offering more than the attacker for outstanding shares. If successful, the attacker may sell their shares or the company may convert them into an employee share ownership plan.
Targeted buybacks are strategies that are sometimes used to thwart a hostile takeover attempt and retain control of a corporation. The exact method of a targeted buyback usually involves buying enough issued stock to regain control of the company and thus have enough votes to prevent the hostile takeover from taking place. In most cases, repurchases of outstanding shares are conducted by offering more than the current market price for each share repurchased.
A targeted buyback may involve circumventing the corporate attacker to acquire as many outstanding shares as possible. This usually means offering shareholders more for each share than the attacker is willing to offer. With luck, the company can buy enough shares before the attacker has acquired a controlling amount of shares and essentially preventing the takeover attempt from continuing.
At that point in the targeted buyback, the company can approach the corporate attacker and make a bid on all the shares the attacker has acquired up to that point. If the price per share is attractive to the attacker, he may choose to sell the shares to the issuing company and abandon the takeover attempt. When this occurs, the targeted buyback can be considered a success.
However, if the attacker is not satisfied with the price per share offered by the company, the situation could become a draw. When this type of situation occurs, the company may choose to combine targeted repurchase efforts with another strategy, such as creating a holding company that receives all acquired shares and begins the process of converting them into an employee share ownership plan. Under these conditions, the attacker usually needs to accept a fair market price for the shares under his control or risk being rendered useless when the government approves the share conversion plan.
Hostile takeovers are a fact of life in modern business today. Depending on the position of the company under attack, a targeted buyback might be a sensible move. However, there are incidences where a targeted buyback attempt may be futile, such as when the corporate attacker is determined to acquire the company for dismantling or when the company lacks the resources to raise enough capital to buy back the shares.
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