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Hostile Takeover Defense Strategies: Golden Parachute

Hostile Takeover Defense Strategies: Golden Parachute


Published by BSIC on 4 April 2021

Golden Parachute

Parachutes save lives. Golden Parachutes do not, but they are interesting nevertheless and worth knowing. Behind the term hide clauses which remunerate top executives in case a company is acquired. The aim is, of course, to deter a potential hostile takeover by decreasing the value of assets through high severance packages. These may include stock options, bonuses, or increased severance pay.

The Golden Parachute is a mechanism as frequently used, as it is criticized. Although it does deter potential takeovers, it can also promote unhealthy practices and remunerate executives which underperform. As such, the critics of the method claim that the “parachutes” often act to harm the company and against the shareholders’ duty to act in the best interest of the firm. The period after the 2008 financial crisis has seen a trend of reducing the bloated severance packages and other clauses initiated when a company is taken over. On the other hand, the proponents assert that the Golden Parachute allows for easier retention and hiring of executives. Further, it can also remove potential drags in a merger process by reassuring current executives that their spots will be retained. However, as it may be easier to justify in industries prone to mergers, it is hard not to see the problem with gigantic sums paid to some CEOs.

More recently, a golden parachute was at the center of a blocked merger between Staples (NASDAQ: SPLS) and Office Depot (NASSDAQ: ODP). The CEO of the latter was set for a $31m pay-out had the merger went through. Nevertheless, even high eight figure sums do not prevent takeovers. One of the more recent examples is Meg Whitman, who received a total of $35.6 m of severance after Hewlett Packard’s (NYSE: HPQ) disintegration in 2016. Also in 2016, when Dell merged with EMC (NYSE: EMC), the latter’s CEO received $27 m in compensation. Overall, at the end of the day, there is a limited number of executives which must be paid off in case of a takeover. Hence, although often extremely high, the Golden Parachute’s shouldn’t be considered as the most effective methods of preventing a hostile takeover.

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Harvey Yan


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