What is whitemail?
A takeover target may use whitemail as a defensive tactic to stop an adversarial takeover effort. A friendly third party purchases a substantial number of shares that the target company issues at below-market prices as part of a whitemail scheme.
RaisingBy raising the number of shares, the acquirer must buy more to obtain control; therefore, the takeover price helps the target evade the acquisition. It also dilutes stock in the company. Furthermore, the number of friendly shareholders rises due to an excellent third party gaining ownership and influence over a sizable block of shares.
The corporation has two options: buy back the issued shares or keep them outstanding if the whitemail tactic effectively deters the takeover.
Understanding Whitemail
When making a hostile takeover offer, two primary strategies are used to get a majority stake in a business.
First, the company’s shareholders may get a tender offer from the purchaser. A tender offer is an offer to purchase a majority stake in the target company at a predetermined price. The price is often set above the current market price to provide sellers with an extra incentive to sell their shares. This formal offer could include terms provided by the purchaser, such as the offer expiration date or other things. To help the target company decide, the acquirer must submit documentation to the Securities and Exchange Commission (SEC) and give a synopsis of its plans.
Since many takeover defense tactics guard against tender offers, a proxy war is frequently waged. A proxy war aims to install new board members who would vote in favor of the takeover instead of those who oppose it. This is accomplished by persuading shareholders that the company requires a change in management and that the board members the potential acquirer would appoint are the ideal solution.
Whitemail is a tactic that involves selling shares to a friendly third party at a market discount to thwart an unwanted takeover attempt. Because it will cost the purchaser extra to use this approach, these additional shares weaken the tender offer. Simultaneously, the newly amiable shareholder is unlikely to consent to a tender offer or a proxy battle to appoint new board members.
Whitemail is one of the many defensive tactics used to stop a hostile takeover.
An instance of whitemail
XYZ Corporation has one million shares. To get a majority stake in the company, ABC Inc. started purchasing as many shares as possible on the open secondary market to acquire XYZ Corp.
When XYZ Corp. learns of this, it decides to implement a policy against whitemail. They issue 250,000 additional shares at a substantial discount to the going rate on the secondary market and sell them all to DEF Industries, a business with which XYZ has a positive working relationship.
ABC will need more shares to acquire a controlling stake due to the rise in existing shares from 1,000,000 to 1,250,000. Furthermore, all XYZ shares now have diminished voting rights, limiting ABC’s ability to choose board members to support their acquisition.
Conclusion
- A hostile takeover defense known as “whitemail” entails issuing many new shares to supportive owners.
- To ward off an unsightly purchaser, the objective is to get enough proxy votes and dilute the shares enough.
- A successful whitemail defense aims for the target business to return its newly acquired shares.
