Every game or business has its slang–colorful code words that may sound ridiculous but serve a useful purpose. Frequent repetition makes the jargon tiresome, but it enables one to talk about what is going on without long explanations.
On Wall Street, many old words have been given new meanings by people caught up in ”merger mania,” itself an overworked phrase.
You probably have read or heard about shark repellent, white knight, black knight, golden parachute and others.
Ben Branch, professor of finance at the University of Massachusetts in Amherst, gave his students a chance to have fun while demonstrating their knowledge of the language of current events. They were assigned to write
Spotlight
about a fictitious corporate takeover, in which Illuminated International Industries Inc., of Indianapolis, acquired Little Lilly Loaded Laggard, of Lafayette, La., after an extended struggle.
The students had to underline all code words and define them.
Here is Branch`s answer to his quiz, as published in the Journal of the American Association of Individual Investors in Chicago:
”Little Lilly Loaded Laggard (LLLL) was first put in play when Illuminated International Industries Inc. (four I`s) moved off of its four-nine position and filed a 13D. LLLL was a clear loaded laggard asset play as its break-up value was more than double its market capitalization.
”At the first sign of the black knight`s
threat, LLLL`s management sought some shark repellent and release from their golden handcuffs. A variety of defense strategies were considered. The crown jewel option was rejected as they had only one jewel and wanted to keep it. Serious consideration was given to going private but the funds required for an LBO were not immediately forthcoming.
”Emissaries were sent to four I`s offering greenmail and, lacking that, seeking a standstill agreement. When the raider rejected those possibilities, LLLL`s envoy threatened a poison pill and/or a scorched earth defense.
”Four I`s, however, believed it was in too deep to turn back. If it sold it now, much of its gain would be subject to the short swing rule. Because the attacking firm was 10 times LLLL`s size, a Pac-Man defense was unfeasible.
”Four I`s threatened to make a two-tier offer with the second stage made up of junk bonds. They asked for a golden handshake. When neither a white knight nor a white squire could be found, LLLL`s management gave four I`s a lock-up and settled for generous golden parachutes.
”They all lived happily ever after, except for the shareholders.”
Then Branch defined the terms:
Asset play: A firm whose underlying assets are worth substantially more
(after paying off the firm`s liabilities) than the market value of its stock.
Break-up value: The sum of the values of the firm`s assets if sold separately.
Crown jewel option: The stratagem of selling or spinning off the asset that makes the firm an attractive takeover candidate.
Four-nine position: A holding of approximately 4.9 percent of the outstanding shares of a company. At 5 percent, the holder must file a form
(13D) with the Securities and Exchange Commission, revealing his position. Thus, a four-nine position is about the largest one that can be held quietly. Black knight: A potential acquirer that management opposes and to which management would prefer to find an alternative (i.e., a white knight).
Going private: Buying back publicly held stock so a public firm becomes private.
Golden handcuffs: An employment agreement that makes the departure of upper level managers very costly to them. Such managers may lose attractive stock option rights by leaving before usual retirement age.
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Golden handshake: A provision in a preliminary agreement in which the target firm gives the acquiring firm an option to purchase its shares or assets at attractive prices or to receive a substantial bonus if the proposed takeover does not occur.
Golden parachute: Extremely generous separation payments for upper-level executives that must be fulfilled if the firm`s control shifts.
Greenmail: Incentive payments to dissuade outsiders who may seek control of a firm. The payment frequently takes the form of a premium price for the outsiders` shares, coupled with an agreement from them to avoid buying more stock for a set period of time. The firm bears the cost of the payment. The stock price generally falls after the payment and the removal of the outside threat.
In play: The status of being a recognized takeover candidate.
Junk bonds: High-risk, high-yield bonds often used to finance takeovers.
LBO: A leveraged buyout. A purchase of a company financed largely by debt backed by the firm`s own assets.
Loaded Laggard: A stock of a company whose assets, particularly its liquid assets, have high values relative to the stock`s price.
Lock-up agreement: An agreement between an acquirer and target that makes the target unattractive to any other acquirer; similar to a golden handshake. Pac-Man defense: The tactic of seeking to acquire the firm that has targeted your firm as a takeover prospect.
Poison pill: A provision in the corporate bylaws or other governing documents providing for a disadvantageous result for a potential acquirer should its ownership position be allowed to exceed some prearranged threshold. For example, if anyone acquires more than 20 percent of Company A`s stock, the acquirer might have to sell $100 of its stock to other shareholders at $50.
Raider: A hostile outside party that seeks to take over companies.
Scorched-earth defense: A tactic in which the defending company`s management engages in practices that reduce their company`s value to such a degree that it is no longer attractive to the potential acquirer. This approach is more often threatened than employed.
Shark repellent: Antitakeover provisions such as the poison pill.
Short swing profit: A gain made by an insider, including anyone with more than 10 percent of the stock, who holds stock for less than six months. Such gains must be paid back to the company whose shares were sold.
Standstill agreement: A reciprocal understanding between a company`s management and an outside party that usually owns a significant minority position. Each party gives up certain rights in exchange for corresponding concessions by the other party. For example, the outside group may agree to limit its stock purchases to keep its ownership percentage below some level
(for instance, 20 percent). In exchange, management may agree to a minority board representation by the outsider.
13D: A form that must be filed with the SEC when a single investor or an associated group owns 5 percent or more of a company`s stock. The form shows the size of the holding and the investor`s intentions.
Two-tier offer: A takeover device in which a relatively high per-share price is paid for controlling interest in a target and a lesser per-share price is paid for the remainder.
White knight defense: Finding an alternative and presumably more friendly acquirer than the takeover threat.
White squire defense: Finding an important ally to purchase a strong minority position (for example, 25 percent) of the potential acquisition`s stock. Presumably the ”white squire” will oppose and, it is hoped, block the efforts of the hostile firm seeking to acquire the vulnerable firm.