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What Is a Back-End Plan?
A back-end plan is an anti-acquisition strategy in which the target company allows existing shareholders to exchange their securities for cash or other securities valued at a price determined by the company’s board of directors. This plan does not provide the provision to the company behind the takeover. A back-end plan is a type of poison pill defense, which is used by companies to prevent a hostile takeover by an outside company.
Key Takeaways
- A back-end plan is an anti-acquisition strategy or poison pill defense used by target firms that don’t want to be acquired.
- The target company provides its shareholders, except for the company attempting the takeover, with the ability to exchange existing securities for cash or other securities.
- Securities are valued at a price determined by the company’s board of directors.
How a Back-End Plan Works
A takeover is a strategy used in mergers and acquisitions (M&A). It involves the acquisition of one company by another. Not all takeovers are friendly—some may be hostile. Hostile takeovers occur when a company wants to take over a target that doesn’t want to be acquired. The target firm may employ strategies of its own to stop the deal from going through. One of these is the back-end plan.
A back-end plan, which is also known as a note purchase rights plan, occurs when a company attempting a takeover bid acquires a certain percentage of outstanding shares of a takeover target. It is a type of put plan, as shareholders have the right to exchange common stock for cash, debt securities, or preferred stock, which is the most typical security issued in connection with a back-end plan. If an outside company acquires a large block of shares, such as 20%, shareholders who hold the preferred stock would be able to acquire super-voting rights.
The back-end price is usually set above the market price and it must be set at a price that is considered to have been made in good faith. By providing shareholders with the right to obtain shares with a higher value if the acquiring company reached a majority stake, the acquiring company would not be able to force a lower share price to complete the acquisition.
Despite the best efforts of the target, the back-end plan may not work. The strategy may fail if the acquiring company offers the target company’s shareholders a price greater than the price specified in the back-end plan.
Special Considerations
Back-end plans were developed in the 1980s as a defense against two-tiered takeover bids. In a two-tiered takeover bid, the acquiring company would pay a high price for shares until it held a majority of shares. The company would then use the voting rights connected with those shares to force the remaining shareholders to accept a lower price in order to complete the merger.
Back-End Plan vs. Other Anti-Acquisition Strategies
Companies fending off a takeover bid may utilize several different techniques designed to make the acquisition so costly and difficult that the acquiring company either gives up—or is forced to negotiate with the company board rather than purchasing shares from existing shareholders. These anti-acquisition strategies are often referred to as poison pills. This includes back-end plans.
Other poison pill strategies that targets can do to keep themselves from being taken over include:
- Golden Parachute: The potential target firm can put clauses in the management team’s contract, giving them bonuses, expensive benefits, and additional compensation if the company is taken over.
- Stock Buyback: This occurs when a company buys back some or all of its shares from shareholders. This helps keep anyone, including a hostile acquirer, from amassing enough shares to become a majority shareholder.
- Crown Jewel: This strategy sees the target selling off its key assets in an attempt to ward off potential acquirers. Selling these assets essentially changes the nature of the company.
- White Knight: The target firm seeks out another acquirer (or a white knight) to save it from being acquired by a hostile company. When the white knight completes the acquisition, which is usually at a premium to the hostile acquirer’s bid, it may work with the target firm to restructure the company according to its management’s wishes.
What Is a Back-End Merger?
A back-end merger is also called a two-step merger. It combines a tender offer with a merger. The tender offer is the first step, where someone acquires the majority of a company’s outstanding shares. Once this is complete, the acquirer goes to the second step, which is the merger or the act of acquiring the remaining shares of the target firm.
What Is a Poison Pill?
A poison pill is a defense strategy that companies use to prevent another company from acquiring them through a hostile takeover. Poison pills include back-end plans, golden parachutes, stock buybacks, crown jewels, and the white knight strategy.
What Is a Hostile Takeover?
A hostile takeover occurs when a firm or investor (usually a large one) tries to acquire a company (usually a smaller one) that doesn’t wish to be purchased. These types of takeovers may take place if the potential acquirer feels its target is undervalued. In other cases, activist shareholders may want to take the target in a different direction. Target firms may use certain strategies to prevent themselves from being taken over, including the white knight defense, selling of their crown jewels (or key assets), or undergo stock buybacks.
The Bottom Line
A back-end plan is a type of poison pill defense that a potential target can use to avoid being taken over by another company. Like other strategies, the goal is to make the company look unattractive to the acquirer. When a company uses this defense, it offers all of the shareholders other than the acquiring firm the chance to exchange their stock for cash or other securities. It doesn’t always work, especially when the acquirer offers a premium over what the target offers its shareholders.