Succession: Bear Hugs and Poison Pills
Succession: Bear Hugs and Poison Pills
The internet’s favorite unrelatable family
I stumbled upon Succession a little over a month ago, and got hooked faster than Kendall tried to bring down his father. That also means I haven’t felt the old fans’ pain of waiting 2 years for season 3 — which I empathize with — and I’m lucky to have all the content still fresh in my head.
The writing in Succession is superb. Not just because it’s uniquely hilarious, and emotional when it needs to be, but also because every character arc just… makes sense. All the moves seem to follow logical trajectories set up episodes before. One main move that starts at the end of season 1 and goes throughout season 2 is Stewy and Sandy’s bear hug on Waystar Royco. Now, buckle up and beware of season 1 and 2 spoilers, as we explain a bit more deeply one of the major arcs in the show.
What is a Bear Hug?
Stewy and Sandy planned an acquisition of Waystar Royco without Logan and the board’s consent. They are planning to acquire a company that doesn’t want to be taken over, making this a hostile takeover. A bear hug is just one way to do that. With this simple, four-step recipe, you can also bear hug any company you want. (You might need a few billion dollars, though.)
Step one: Set a purchase value
The bear hug is one of the “nicest” forms of hostile takeovers because it requires the takers to pay more than the stock is worth. Usually, significantly more to make it a tempting offer. In the show, the most they reveal is that the stock price of Waystar Royco dipped below $130, and the price Kendall mentions in the bear hug is of $140, or about 8% higher than its fair price.
What is also interesting is that, if traders were to hear of the secret plan, they’d go ahead and buy Waystar shares, hoping for a profit, and increase its price all the way up to $140. (At least in theory, which often differs from reality.) This would either make the offer less impressive, because the 8% premium would no longer be there, or require the baddies to find more money. That’s why when Stewy hears of possible leaks because Kendall spilled the beans in the wedding, he pressures him to execute the plan right away, rather than waiting a few days.
Step two: Make an offer to the board
This is the dramatic moment in which Kendall makes the offer to his father and foolishly tries to pitch how it is better for investors. The board has a fiduciary duty with the shareholders of the company, meaning they have the legal (and ethical, if anyone cares) obligation to do what is best for them. It’s hard to argue against an offer that is 8% above the stock price of a company that is going downhill.
Unsurprisingly, Logan says no.
Step three: Make the offer public
As we know, Kendall abandons the plan because of… uhh… personal reasons. Nonetheless, Logan’s refusal doesn’t shock Stewy and Sandy, who decide to make the offer public. If the board won’t budge, the shareholders — the ones who actually get to elect the board — can pressure them.
This is pretty standard in bear hugs. When Microsoft attempted to bear hug Yahoo, they made their offer public less than 24 hours later. Clearly, the offer wasn’t quite for the board, but for the people.
Step four: ????
At this point, anything could happen.
Maybe the board yields. Maybe the shareholders put the needed pressure and vote for the acquisition. Maybe management gets to put a good enough fight to survive the attempt. In Succession, as of the end of season 2, we don’t know what happens yet. The Roys have been resisting and stalling, but we don’t know how much longer they can stand.
If the company’s management really doesn’t want to be taken over, as the Roys don’t, they can come up with plans to resist the takeover. One famous one used by Netflix and hinted is the show is called “swallowing the poison pill.”
The Poison Pill
They don’t get into detail about this on the show, only mentioning it passing, and I don’t think it will become a major plot point. I’d love to be wrong. Nonetheless, when Netflix was suffering a bear hug in 2012, it employed this tactic as a defense.
The official name for Netflix’s poison pill was the “shareholder rights plan,” which is a cute euphemism. However, calling it a poison pill is reasonable because it could potentially damage the company’s shares just for the sake of avoiding acquisition. It might not be the best idea, but it can definitely be effective.
TLDR: Issuing new shares
For the takeover to succeed, the acquirer must buy more than 50% of the company’s shares. If the company adds more shares to the market, then reaching that percentage becomes more difficult. However, who gets to buy the new shares?
For the company to resist acquisition, they’d want anyone except the acquirer to buy those shares. Luckily for them, they can enforce that. Usually, the rule also restricts the new shares only to existing shareholders. In order to make that purchase attractive, the new shares are issued at a discount, say, 10% cheaper than the current market rate. The new shares dilute the value of the old shares, hurting literally all the other investors in the company — making it a tough poison pill to swallow.
And should those shares be issued? That also depends. In Netflix’s case, they set their shareholder rights plan to automatically issue new shares the second Carl Icahn (the attempted acquirer) held a single share past his existing 10% stake at the company.
After the Survival
The poison pill doesn’t even need to be executed, it just needs to become a real enough threat to make the acquirer give up. And indeed, Carl Icahn gave up on Netflix, which proved to be great for the company. Similarly, Yahoo managed to put a good enough fight to make Microsoft give up on its $45B offer on the company, which successfully lived its downhill trajectory and was sold years later for $4.5B.
In Succession, Logan mentions that Waystar Royco could end up like Kodak, almost worthless. The $140 price was a good offer, and the family would walk away with a lot. So would the shareholders, of course, but they don’t care.
We’ll see what happens in season 3.
By the way, I love trying to understand better the arcs in the shows and films I enjoy. It’s very refreshing to see writers actually research well into making the plot realistic. We in tech are normally not so lucky. That said, I’m always open to many suggestions of shows and things to look into.