Economists generally assume that firms try to maximize profit because of the survivor principle as well as the market for corporate control. According to the survivor principle, in highly competitive markets, the only firms that survive are those that are run so as to maximize profit. Firms that fail to maximize profit lose money and go out of business. Even in less competitive markets, managers can be disciplined through the market for corporate control, where outside investors use the stock market to buy enough shares to take over control of an underperforming publicly traded firm. An outsider may profit by seizing control of a company in which the current managers are doing a poor job undertaking unprofitable projects and spending money on their own comfort and compensation with little profit going to the shareholders in the form of dividends or capital gains. If the acquiring firm can convince enough shareholders that profit will rise after a takeover, the shareholders can vote out the existing board and management and vote in the one the acquiring firm recommends. 

For example, Sophia, the manager of an underperforming company, is worried because a well-known corporate raider (such as Carl Icahn or T. Boone Pickens) is buying many shares of her firm. She's sure that the raider is planning a hostile takeover and will replace the current managers with new managers, whom he believes can turn around the underperforming firm. How does Sophia keep her job? If she can't instantly improve the firm's performance, she may hire the cleverest corporate lawyer she can find to construct takeover defenses. 

Question: 

What is the possible strategies that Sophia and the management of the company can use to defend the takeover attempt? 

Answer rating: 100% (QA)

Sophia and the management team could employ various takeover defense strategies Poison Pill Implemen... View the full answer