POISON PILL |
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What is a Poison Pill?
• The poison pill is a psychology-based defensive technique where the minority shareholders are protected from an unprecedented takeover or a hostile management change by using techniques to increase the cost of acquisition to a very high level and create disincentives if a takeover or management changes happen to alter the decision maker's mind.
• Poison pills allow existing shareholders the right to purchase additional shares at discount, a effectively diluting the ownership interest of a new, hostile party.
Understanding Poison Pill?
• Takeovers are fairly common in the business world, where one company makes an offer to assume control over another. Larger companies tend to take over smaller ones if they want to get into a new market.
• The poison pill tactic has been around since the 1980s and was devised by New York-based legal firm Wachtell, Lipton, Rosen, and Katz. The name comes from the poison pill spies carried in the past to avoid being questioned by their enemies in the event they were captured.
• When a company becomes the target of a hostile takeover, it may use the poison pill strategy to make itself less attractive to the potential acquirer. As the name indicates, a poison pill is analogous to something that's difficult to swallow or accept.
• The mechanism protects minority shareholders and avoids the change of control of company management.
Types of Poison Pills
• FLIP-IN: When corporate raiders buy sizeable holdings in a company, Flip-in is one of the most preferred strikes back. Here the target company buys a large number of shares at a discounted rate to counter the offer, which eventually leads to the dilution of control of the acquirer.
• FLIP-OVER: Flip-over is the opposite of Flip-in and happens when the shareholders choose to buy shares in the acquirer's company after the merger. A flip-over poison pill strategy allows stockholders of the target company to purchase the shares of the acquiring company at a deeply discounted price if the hostile takeover attempt is successful.
Examples of Poison Pills:
• Netflix: Carl Icahn, an institutional investor, caught Netflix off-guard in 2012 by acquiring a 10% stake in the company. The latter responded by issuing a shareholder's right plan as a "Poison Pill", a move that irked Carl Icahn to no end. A year later, he cut his holding to 4.5%, and Netflix terminated its right issue plan in December 2013.
• Micron Tech: The Board of Directors of Micron Technology Inc., the largest US memory chipmaker, adopted a "Poison Pill" strategy in the apprehension of a hostile takeover. The tactic was a rights issue that would be triggered if an individual or group acquires 4.99% or more of the company's outstanding stock
Key Takeaways
• A people poison pill is one of several defensive strategies a company may pursue to prevent an unwanted takeover.
• The target company's management team threatens to resign if a takeover it doesn't want goes ahead.
• If all the individuals responsible for the target company's success quit, the acquirer may reconsider pursuing a deal.
• Such measures will only prove discouraging if the bidding party actually plans to keep the existing management.
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