A poison pill is a strategy employed by a company to make itself less attractive to a hostile takeover bid. The poison pill is usually in the form of poison pills are usually in the form of increased debt or dilutive shares.
The poison pill is designed to make the potential acquirer think twice about going through with a hostile takeover attempt.
After all, why would they want to take on a company that is loaded with debt or has a large number of shares outstanding?
There are different types of poison pills, but the most common are:
– Debt poison pills: These involve the company taking on debt just before a hostile takeover attempt. This makes the company less attractive because the acquirer would have to assume this debt.
– Dilutive poison pills: These involve the company issuing more shares, typically to employees or loyal shareholders. This dilutes the ownership stake of the potential acquirer and makes a hostile takeover less attractive.
Flip-in Poison Pill
A flip-in poison pill is a type of poison pill that is triggered when an acquirer reaches a certain level of ownership in the target company.
At that point, the poison pill is activated and other shareholders, except the acquirer, can purchase shares at a discount, thereby diluting the acquirer’s stake.
This right to purchase is given to shareholders before the hostile takeover is finalized and is typically triggered when the acquirer gets to a certain threshold percentage of shares of the target company.
In simple terms, the flip-in poison pill is designed to make a hostile takeover attempt less attractive by diluting the ownership stake of the potential acquirer.
Flip-over Poison Pill
A flip-over poison pill is a type of poison pill that is triggered when an acquirer reaches a certain level of ownership in the target company at the point the acquirer is considered to gain control of the target company.
The flip-over poison pill is designed to make a hostile takeover A poison pill that gives existing shareholders the right to buy more shares at a discount if a hostile takeover is successful.
For example, a target company shareholder may gain the right to buy the stock of its acquirer at a rate that’s effectively cheaper than the market rate, thus diluting the equity in the acquiring company.
The acquirer may not want to go ahead with the acquisition if it perceives the poison pill will dilute the value after the acquisition.
Why would a company want to use a poison pill?
There are several reasons why a company might want to use a poison pill:
- To protect the company from a hostile takeover by entities that may do it harm or have no experience in managing such a business
- To keep existing management in charge
- To block a takeover attempt that might be beneficial for shareholders
- To give existing shareholders the right to buy more shares at a discount if a hostile takeover bid is made
If a poison pill is successful, it can effectively protect a company.
Poison Pill Example
Twitter had a takeover offer in April 2022. The company’s board of directors announced it had approved a shareholder rights plan, otherwise known as a poison pill.
This would allow shareholders to purchase discounted stock in the event of an entity or person acquiring more than a 15 percent stake in the company without the board’s approval.
Other strategies – Poison pill alternatives
The poison pill is just one strategy that companies use to defend themselves against hostile takeovers.
Other strategies include the white knight, golden parachute, and shark repellent.
Let’s take a look at these poison pill alternatives.
White knight
The white knight is when a better takeover offer comes in and beats out a takeover from another entity they don’t want having influence on the company.
For example, JPMorgan’s 2008 purchase of Bear Stearns helped it avoid complete insolvency during the financial crisis.
In the newspaper publishing business, some view Alden Global Capital as a bad influence because they often make deep cost cuts to publishers, which typically involve layoffs among other measures. They may be important to making newspapers sustainable, but naturally these moves are controversial.
So when somebody outside of Alden makes a bid on newspapers, they are often considered a white knight.
A lot of the idea of a “white knight” involves the perception of who would provide better stewardship to a business.
Golden parachute
A golden parachute is an agreement between a company and its executives that gives the executives certain benefits if they are fired or leave the company under specific circumstances.
For example, if an executive is fired because the company is sold, they may receive a severance package worth several years of their salary.
Golden parachutes are often used to essentially protect executives from being fired in a hostile takeover, as they’re generally believed to be the most knowledgeable and most important people behind the running of the company.
Shark repellent
Shark repellent is a type of poison pill that makes it more difficult for an entity to acquire a company.
For example, a company might have a rule that any shareholder who acquires more than 10 percent of the company’s stock must offer to buy all outstanding shares at the same price.
Or a company might require a supermajority of shareholders (two-thirds or three-fourths) to approve any sale of the company.
This makes it much more difficult and expensive for an entity to acquire a company through a hostile takeover.
Final word
Poison pills are one strategy that companies use to defend themselves against hostile takeovers.
Poison pills are a way to make a hostile takeover more difficult and expensive, which can protect the company from entities that may do it harm or have no experience in managing such a business.
Other strategies include the white knight, golden parachute, and shark repellent.