shark repellent".
Golden Parachute
A golden parachute measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. Benefits written into the executives' contracts include items such as stock options, bonuses, liberal severance pay and so on. Golden parachutes can be worth millions of dollars and can cost the acquiring firm a lot of money and therefore act as a strong deterrent to proceeding with their takeover bid.
Greenmail
A spin-off of the term "blackmail", greenmail occurs when a large block of stock is held by an unfriendly company or raider, who then forces the target company to repurchase the stock at a substantial premium to destroy any takeover attempt. This is also known as a "bon voyage bonus" or a "goodbye kiss".
Macaroni Defense
This is a tactic by which the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a higher price if the company is taken over. Why is it called macaroni defense? Because if a company is in danger, the redemption price of the bonds expands, kind of like macaroni in a pot! This is a highly useful tactic, but the target company must be careful it doesn't issue so much debt that it cannot make the interest payments.
Takeover-target companies can also use leveraged recapitalization to make themselves less attractive to the bidding firm.
People Pill
Here, management threatens that in the event of a takeover, the management team will resign at the same time en masse. This is especially useful if they are a good management team; losing them could seriously harm the company and make the bidder think twice. On the other hand, hostile takeovers often result in the management being fired anyway, so the effectiveness of a people pill defense really depends on the situation.
Poison Pill
With this strategy, the target company aims at making its own stock less attractive to the acquirer. There are two types of poison pills. The 'flip-in' poison pill allows existing shareholders (except the bidding company) to buy more shares at a discount. This type of poison pill is usually written into the company's shareholder-rights plan. The goal of the flip-in poison pill is to dilute the shares held by the bidder and make the takeover bid more difficult and expensive.
The 'flip-over' poison pill allows stockholders to buy the acquirer's shares at a discounted price in the event of a merger. If investors fail to take part in the poison pill by purchasing stock at the discounted price, the outstanding shares will not be diluted enough to ward off a takeover.
An extreme version of the poison pill is the "suicide pill" whereby the takeover-target company may take action that may lead to its ultimate destruction.
Sandbag
With the sandbag tactic the target company stalls with the hope that another, more favorable company (like "a white knight") will make a takeover attempt. If management sandbags too long, however, they may be getting distracted from their responsibilities of running the company.
White Knight
A white knight is a company (the "good guy") that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party (a "black knight"). The white knight offers the target firm a way out with a friendly takeover.
Conclusion
The next time you read a news release that says that your company is using a poison pill to ward off a takeover attempt, you'll now know what it means. More importantly, you'll know that you have the opportunity to purchase more shares at a cheap price. M&A has an entire vocabulary of its own, expressed through some of the rather creative strategies employed in the process, such as the ones we've touched on above. Hopefully by reading this article you are at least a bit wiser in the wacky world of M&A terminology. By understanding what is happening to your holdings during a takeover or attempted takeover, you may one day even save money.