Poison Pill: Strategic Takeover Defense

A strategic defense mechanism used by takeover target companies to make their stock less attractive to potential acquirers.

The ‘Poison Pill’ is a strategic move employed by a company that is a target of a takeover to make its stock less attractive to the potential acquirer. The primary aim is to thwart unsolicited takeover attempts by making the cost of acquisition prohibitively expensive.

Types of Poison Pills

Flip-In Poison Pill

In a flip-in poison pill, existing shareholders (excluding the acquirer) are entitled to buy additional shares at a discount, diluting the acquirer’s ownership stake.

Flip-Over Poison Pill

A flip-over poison pill permits shareholders to purchase the shares of the acquirer at a discounted rate after the merger, making the takeover less desirable.

Mechanisms and Implementation

A firm may adopt one or more of the following mechanisms to institute a poison pill:

• Issuance of Preferred Stock: The company authorizes a series of preferred stock that shareholders can redeem at a premium price after the takeover.
• Shareholder Rights Plans: These plans grant existing shareholders special rights, such as purchasing more stock at significantly reduced prices, once a takeover bid is announced.

Historical Context and Evolution

The poison pill strategy was conceived in the early 1980s by famed mergers and acquisitions attorney Martin Lipton. It quickly gained traction as an effective antitakeover tool. Over the years, poison pills have evolved, with modifications to fit the changing corporate landscape and regulatory environment.

Applicability and Examples

Case Study: Netflix

Netflix implemented a poison pill strategy in 2012 to prevent activist investor Carl Icahn from acquiring a controlling stake. By issuing new shares, Netflix diluted the value of the shares made it costlier for Icahn to proceed with the takeover attempt.

Defensive Measure for Small Companies

Smaller firms also use poison pills to fend off larger corporations seeking to acquire them undervalued. By making their shares less attractive, they can negotiate better terms or remain independent.

Comparisons and Related Terms

White Knight

A ‘white knight’ is a preferable acquirer invited by the targeted company to ward off a hostile takeover by a less favorable acquirer.

Golden Parachute

Golden parachutes refer to substantial benefits guaranteed to top executives if the company is acquired and they lose their jobs.

Shareholder Rights Plan

Often synonymous with poison pills, shareholder rights plans are specific mechanisms under the broad umbrella of poison pill tactics.

FAQs

What triggers a poison pill?

A poison pill is usually triggered when an acquirer buys a specific percentage of the company’s shares, which activates the shareholder rights plan or preferred stock issuance.

Are poison pills legal?

Yes, poison pills are legal; however, they must comply with corporate governance laws and regulations which vary from country to country.

Can a poison pill be removed?

Yes, the company’s board of directors can revoke or nullify a poison pill if they decide to negotiate with the acquirer.

Summary

The poison pill is a vital strategy in the toolkit of corporate defense against hostile takeovers. By making the acquisition process more expensive and less attractive, companies can buy time to seek better terms or alternative solutions. This strategic move has withstood the test of time and continues to evolve, reflecting its critical role in modern corporate governance.

References

1. Lipton, M. (1982). “Takeover Bids in the Target’s Boardroom”. The Business Lawyer.
2. Netflix SEC filing. (2012). “Shareholder Rights Plan”.
3. Bebchuk, L., & Cohen, A. (2005). “The costs of entrenched boards”. Journal of Financial Economics.

By implementing the poison pill effectively, companies can maintain control over their destiny, ensuring that any acquisition is on their terms.