Poison pill
Poison pill was invented in the 80s of the twentieth century in the United States during intensive process of hostile takeovers in the capital market. Poison pill as one of the most popular methods of defense against this type of acquisition.
It consisted of negative obligations taken by company, which had to be settled immediately upon successful hostile takeover attempts. It aimed at drastically reducing the attractiveness of the company for potential acquisition stakeholders.
Types of poison pill
As a result of severity of hostile takeovers in the 80s of the twentieth century, there arose many advising companies specialized in this type of operation, as well as companies offering increasingly sophisticated and effective methods of defence. This allowed the isolation of several types of mechanisms of "poison pill". These include:
- Issue of rights to existing shareholders entitling them to buy shares at specified prices. They are issued for long periods (up to 10 years). The present owners of the c, in the absence of hostile takeovers threats, can purchase these shares at any time and withdraw from the market by paying a nominal amount.
Redemption price of new shares remained well above the market price, with the result that these rights did not have real value, in the case of a hostile takeover they significantly worsened the financial situation of the company. Over a period of operation of these laws, they remained only a dead tool of defence. Only at the moment or before hostile takeover these rights become due and are traded. As a result of certain share purchase price resulting from the written rights, a shareholder may purchase securities of the newly formed company for about half their market price.
- The use of so-called Golden umbrella - granting to the highest authorities of the company a very high clearance in the event of a hostile takeover and loss of their position in company.
- Incurring very high debt, for immediate repayment and high interest rates in the time of the takeover.
Examples of application
Poison pill was first introduced by the famous American lawyer Martin Lipton in 1982. It was a very dynamic period of the spread of mergers and acquisitions transactions, which arose as a result of numerous firms engaged in both legal and financial services.
See also: Shareholder value added
An example of successful use of poison pill defence was attempt to take over Yahoo! by Microsoft in 2008. Not agreeing to low offer Yahoo! authorities decided to protect all workers employed on fixed-time guaranteeing them, in case of dismissal, salary for a period of 2 years from the date of acquisition and the high clearance. This increased the cost of acquisition and effectively discouraged the Redmond giant.
Advantages of Poison pill
Poison pill is a strategy used by companies to prevent hostile takeovers by making the company less attractive to an unwanted bidder. The advantages of this strategy include:
- Creating a disincentive for an unwanted bidder to acquire the company, as well as discouraging other potential buyers from attempting a takeover. By making the company’s stock less attractive, the poison pill makes it more difficult for an acquirer to gain control of the company.
- The poison pill can also create a bargaining advantage for the board of directors. The board can use the poison pill as leverage to negotiate a more favorable deal with a potential acquirer.
- The poison pill can also provide protection for the existing shareholders of the company. By making the company less attractive to a potential acquirer, the poison pill decreases the chances that the acquirer will offer a lowball bid to the existing shareholders.
- Finally, the poison pill can also help to protect the employees of the company. By making the company less attractive to a potential acquirer, the poison pill may discourage an acquirer from attempting a takeover and thus protect the jobs of the existing employees.
Limitations of Poison pill
Poison pill is a defensive strategy used by companies to prevent hostile takeovers. However, there are several limitations associated with its use. These include:
- It is not always effective in preventing hostile takeovers as it relies on shareholder approval. If a bidder is willing to pay a high enough premium above the current market price, shareholders may still vote in favor of the takeover.
- It is expensive to implement a poison pill strategy as it requires significant resources and time to set up and implement.
- It can create a negative image of the company in the eyes of potential investors and customers, as it may signal distress or instability in the company.
- It may be seen as a signal of management entrenchment, as it is used to protect the current management from being replaced by a new one.
- It may run the risk of being challenged in court as it may be seen as anti-competitive or unfair to shareholders.
To defend against hostile takeovers, there are a number of other strategies than the poison pill. These include:
- The Golden Parachute which involves giving the executives of the target company large severance payments if their company is taken over. This can make the takeover less attractive to the hostile bidder, as the costs of the takeover are increased.
- The Pac-Man Defense is a tactic used by the target company to turn the tables on the hostile bidder. This involves the target company launching a counterbid to buy out the bidder’s shares.
- The White Knight is a friendly bidder who is invited by the target company to purchase the company and ward off the hostile bidder.
- The Staggered Board is a tactic used by the target company to make it more difficult for a hostile bidder to acquire a majority of the board. This involves using staggered terms for board members, so that not all board members are up for re-election at the same time.
In summary, the poison pill is just one of the many tactics that can be used to defend against hostile takeovers. Other strategies include the Golden Parachute, the Pac-Man Defense, the White Knight, and the Staggered Board.
| Poison pill — recommended articles |
| Golden parachute — Phoenix company — Dissenters right — Friendly takeover — Full Ratchet — Asset sales — Authorized Stock — Equity Participation — Shareholder loan |
References
- Ryngaert, M. (1988). The effect of poison pill securities on shareholder wealth. Journal of Financial Economics, 20, 377-417.
