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 defense. 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.
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.
- Ryngaert, M. (1988). The effect of poison pill securities on shareholder wealth. Journal of Financial Economics, 20, 377-417.