What Is Whitemail?
Whitemail is a proactive and defensive strategy a company can employ to safeguard itself from a hostile takeover attempt. Whitemail involves the target firm issuing a significant number of shares at below-market prices, which are then purchased by a friendly third party.
This move helps the target company avoid the takeover by increasing the total number of shares the acquirer must purchase to gain control, thus increasing the cost of the takeover. Additionally, it dilutes the existing shareholders’ equity. By having a friendly third party own a significant portion of shares, the company’s defense is bolstered further as the friendly shareholder is unlikely to support a hostile takeover.
If the whitemail strategy is successful in discouraging the takeover, the company has the option to either buy back the shares or leave them outstanding.
Key Takeaways
- Whitemail is a defensive strategy to fend off hostile takeovers by issuing new shares to friendly parties.
- The goal is to dilute shares enough and secure sufficient proxy votes to deter the unwanted acquirer.
- A successful whitemail defense can result in the target company re-acquiring its new shares.
Understanding Whitemail
Two main tactics typically employed to acquire controlling interest in a hostile takeover are tender offers and proxy fights.
In a tender offer, the acquirer makes a bid directly to shareholders to buy a controlling share of the company’s stock at a fixed price, usually at a premium to incentivize sellers. Specifications may be added, and paperwork is filed with regulatory authorities.
Another tactic is a proxy fight, wherein the acquirer’s goal is to replace existing board members with new ones amenable to the takeover. Shareholders are convinced that a management change is necessary, thus installing the acquirer’s choice of board members.
Whitemail comes into play by undermining these tactics. By issuing a large number of shares at a discount to a friendly third party, the company increases the difficulty for the acquirer to gain control. At the same time, the friendly third party is less likely to agree to a tender offer or support a proxy fight.
Whitemail is just one of several defensive strategies available to avert a hostile takeover.
Example of Whitemail
Imagine XYZ Corporation has 1,000,000 shares outstanding. ABC Inc. aims to acquire XYZ Corp. and starts buying shares in the secondary market to gain a controlling proportion.
XYZ Corp., aware of ABC’s intentions, institutes a whitemail policy. They issue 250,000 new shares at a discount to the current market price and sell them to DEF Industries, a company with a positive relationship with XYZ.
By increasing the outstanding shares to 1,250,000, XYZ Corporation increases the number of shares ABC must purchase to gain a controlling interest. Additionally, the dilution of voting rights lessens ABC’s ability to influence board member voting.
Frequently Asked Questions
What Is a 51% Hostile Takeover?
A 51% hostile takeover occurs when an acquiring company quietly buys 51% of the target company’s shares, gaining majority ownership and decision-making power.
What Happens to Your Stock in a Hostile Takeover?
In a hostile takeover, the target company’s stock prices generally rise, primarily because the acquiring company offers a premium for the shares.
Are Hostile Takeovers Legal?
Yes, hostile takeovers are legal and often involve acquiring shares, appealing to shareholders, or replacing management. However, legal complexities may arise, potentially thwarting the takeover.
The Bottom Line
The corporate world is a dynamic and competitive environment where companies battle for control, market share, and profitability. While acquisitions can significantly grow a company, not all target firms are willing to be acquired. Defensive strategies like whitemail can effectively increase the cost of acquisition for the unwanted acquirer, thereby protecting the target company from undesirable takeovers.
Related Terms: hostile takeover, tender offer, proxy fight, poison pill, crown-jewel defense, white knight, Pac-Man defense.
