The rules: If you're CEO of a company and somebody starts buying up a major chunk of your stock with the intent of taking you over, you've got roughly four basic ways to stop him. The first is to try and bribe that buyer to go away, paying him a ransom—politely called greenmail—to sell his holdings and disappear. (More than one corporate raider you've read about in the papers has made millions in a couple of weeks using that very play.) The drawbacks of trying to buy off a potential acquirer are, (1) it's expensive, and (2) maybe he really does plan to eat you, in which case it won't work anyway. Matsuo Noda was in that category.
A second popular means to thwart a hostile takeover is to go out and find somebody else to buy you first, the proverbial "white knight." Ideally this friendly buyer should be, (1) too big to be taken over himself, and (2) willing to let you keep your playpen.
A third technique to stop somebody from acquiring a controlling chunk of your stock is to jack up the price, usually by offering to buy it yourself. Float some junk bonds, sell off a few divisions, do anything that will raise cash and then offer the shareholders more than the raider is willing to bid. This can be very expensive, but if you're a CEO with millions in compensation every year, why should you care if your stockholders' company is leveraged to the brink of ruin? You've still got your job and your goodies. It's used a lot.
The fourth and most fashionable way these days to stop hostile mergers is to try and make yourself unmergeable. To do that, you get your board of directors to vote a poison pill. What this does is make sure that any company that swallows you is going to be ingesting a piranha that will eat said company's own guts instead. The newest twist on this is to use phony bonds with a so-called flip-over provision, a killer pill invented by a clever New York law operation I won't name but whose initials might be WLR&K. Their game is as follows. In order to protect yourself you invent some convertible bonds and stash them away somewhere, ready. Then, should a raiding company start acquiring your stock or make an unauthorized tender offer to your shareholders, you hand out these little bombs to everybody who owns your shares. If this unfriendly company is then unlucky enough to actually acquire you, those convertibles "flip over" into the stock of that buyer. Your stockholders suddenly have the right to exchange their funny paper for huge, discounted chunks of real stock in the acquiring company—which would, naturally, be ruined should that happen. And usually, just for good measure, you also vote through a few "golden parachutes" for you and all your cronies, giving everybody in the executive suite severance pay in the tens of millions.
Those were the stakes. Now, a lot of outfits suddenly found themselves being bought by a mysterious Japanese entity named Dai Nippon, International. What were they going to do? At first of course everybody just assumed NDI was merely angling for a little greenmail. No such luck. After a couple of days went by and we hadn't returned anybody's phone call, they knew that wasn't it. Next, a few went looking for a white knight with more money than DNI (a tough assignment). Not surprisingly, however, most corporate managers very quickly decided to call a board meeting and ram through a poison pill.
I got more than a few phone calls at my downtown office from CEOs wanting to know if I could pitch in and help them stave off what looked like an unfriendly Japanese buy-up. I had to say, sorry fellows, I'm unavailable. But why not give it your best shot and try the old "pill"?
Most of them did. They had no option really.
Which suited me fine.
The time was late Friday—the afternoon was gorgeous, sunny and crisp—and the place was Noda's office. Naturally he understood all about poison pills, so he knew the problem. What he wanted to hear was our solution.
"I'd like to try something that's never been done before. A different battle plan." I glanced out at the blue sky and wished I was already in St. Croix on holiday with Amy. "However, I think it's possibly just unconventional enough to fly."