A “Just say no” takeover defense is a defensive strategy in mergers and acquisitions adopted by the management of the target company in light of a hostile takeover approach. Just “saying no” implies the bid is insufficient or simply unsolicited and no further action is deemed necessary by target management.
Target management often use this “Shark Repellent” type of defense in conjunction with a long-term corporate strategy that it is pursuing. This may be a turnaround plan to make the company profitable or may be a merger with an alternative firm other than the one making the takeover bid. In these instances, management try to value the target firm using the expected value of a successful long-term strategy (or another metric favorable to themselves) and thus claim the acquirer offer significantly undervalues the target and should be dismissed.
Just Say No Defence Example
A recent example of a just say no merger defense is Red Robin Gourmet Burger’s (RRGB) response to a hostile bid from private equity firm Vintage Capital Management, LLC. The following quote is from an 8-K form filing made on September 5, 2019 by RRGB with the SEC.
The Board unanimously determined that the proposal undervalues Red Robin and is not in the best interests of all shareholders, as the strategic plan currently being implemented by Red Robin positions the Company to deliver greater long-term value to its shareholders than Vintage’s proposal.
The acquirer, Vintage Capital is offering a fair value with a control premium way in excess of the current market value when valued using the Precedent Transaction Analysis method. However, the RRGB board claims this undervalues the company and they wish to pursue their own strategic long-term plan. It should be noted however, at the time of writing, the Board had engaged in dialogue with Vintage. Subsequently, the board has continued to say “no”, thus making the exact definition of the defense a grey area.
A Just Say No takeover defense is surprisingly successful and can prove to be very expensive for merger arbitrage traders. Many investors are lured into the wider spread because of the lower Deal Closing Probability (DCP) commonly associated with hostile takeovers. Investments are made without being aware of the risks of these deals not being consummated as expected. Should the acquirer choose to walk away, the target stock price will fall significantly. However, the volatility this type of defense creates in the merger spread can provide many investment opportunities. A frequent trading strategy such as active arbitrage using a scalping technique may increase potential profit dramatically.
