Corporate Law Savants: Explain this aspect of Unocal... Forum

[GertrudePerkins]

My analysis must be clearly go astray somewhere, just not sure where:
Unocal hoped to prevent Mesa from acquiring control in part by buying back tons of its own stock. But when a company buys back its own stock, it either retires it or holds it as non-voting treasury stock. So it would seem that by doing so, Unocal would in fact wind up increasing Mesa's relative control. To take an exaggerated version: say Mesa originally owned 10% of Unocal, but then Unocal buys back 50% of the outstanding shares; doesn't Mesa sort of now own 20%?

Again, I'm clearly wrong about something, I just don't understand what.

[bdubs]

You're misunderstanding the mechanism. Unocal passed a resolution that would trigger a share buyback for $72/share in bonds only after Mesa reached a certain holding level (64 MM shares). This trumped Mesa's offer of $54/share in bonds for the remaining shareholders. This essentially made Unocal unattractive as a takeover target because Mesa would have been either unable or financially unwilling to service the debt on the $72/share bonds.

The Mesa shares were exempted from the buyback offer.

[GertrudePerkins]

Okay, so basically Unocal committed itself to take on a bunch of debt (i.e., notes for shares) if Mesa reached a threshold level of control, which debt would then make it very unappealing for Mesa to fully take over Unocal?

Thanks for the helpful gloss. But am I right about the more general/basic idea that when a corp buys back its own shares it thereby increases the relative control of all remaining outstanding SHs? (Assuming it doesn't buy back pro rata from all SHs simultaneously.)

[bdubs]

Thanks for the helpful gloss. But am I right about the more general/basic idea that when a corp buys back its own shares it thereby increases the relative control of all remaining outstanding SHs? (Assuming it doesn't buy back pro rata from all SHs simultaneously.)

Yes, that is why companies who are takeover targets don't do that.

[joeshmo39]

It's called a poison pill for a reason

amirite?