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In this real world example, a business is faced with a hostile takeover bid for the company, and the board of directors must decide among the following four courses of action:

1. enact a poison pill plan to entrench management and fend off the hostile bid,
2. work with one of the major shareholders to seek another more friendly buyer for the business (a white knight),
3. pursue a going private (management buyout, or MBO) led by the former CEO, or
4. they can accept the unfriendly raider's offer.

There are five directors on the board,

the current CEO, who wants to keep his job and keep control of the company
a former CEO, who is adamant that the raider is rejected and is trying to lead a MBO
a large stockholder, who is also strongly against the raider and would like to pursue a white knight option, and
two outside directors who are in league with the raider.

Their preferences for each of the four options are listed below:

Current CEO - Poison Pill, MBO, White Knight, Hostile Bid
Former CEO - MBO, Poison Pill, White Knight, Hostile Bid
Large Stockholder - White Knight, MBO, Poison Pill, Hostile Bid
2 Outside Directors - Hostile Bid, White Knight, MBO, Poison Pill

The board votes with a secret ballot and finds that no option wins a majority of the initial vote.

Next, the board votes to try to determine which of the three buyout options, the hostile bid, the management led buyout, or the large stockholder led white knight buyout is most preferable. Again, none of the three buyout options gets a clear majority of votes and the board is deadlocked.

The board then agrees that they will first decide on the two alternative buyout options (White Knight and MBO). A vote will be taken between these two options, with the winner to be compared to the hostile bid option in a second vote in order to determine a "buyer of choice". That "buyer of choice" option will then be compared to the poison pill strategy in a final vote.

It is evident that if the hostile bidder is successful, the current CEO will lose his position. If a White Knight is found, the CEO has a 67% chance of losing his position, and if the poison pill or MBO options are pursued, the CEO will be able to keep his position.

The two outside directors, on the other hand, are interested in making sure that some form of buyout happens.

if the MBO, White Knight, and hostile bids are all similar in value,

Q1: Can the hostile bid succeed?
Q2: Can the poison pill succeed?
Q3: What should the outside directors do to ensure some type of buyout?


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