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Poison Pill

Definition

A “poison pill” is a strategic defensive measure used by corporations to deter hostile takeovers. It involves adopting policies or making changes that would make the company less appealing or profitable to potential buyers. This can include tactics like selling assets or issuing new shares to dilute the stock’s value.

Phonetic

The phonetic spelling of “Poison Pill” is /ˈpɔɪzən pɪl/.

Key Takeaways

<ol><li>A Poison Pill is a defensive strategy deployed by companies to prevent hostile takeovers. When activated, this strategy dilutes the shares of the acquirer, making the takeover more expensive and unattractive.</li><li>The essence of a poison pill lies in triggering special rights for existing shareholders when a certain event, such as a single entity buying a significant proportion of the company’s shares, occurs. These special rights usually include buying more shares at a discount or acquiring shares in the acquiring firm at a favorable exchange rate.</li><li>Despite the controversial nature of Poison Pill strategies, they can serve to protect the interests of both the company and its shareholders by ensuring management reacts appropriately to unsolicited takeover attempts and potentially bringing the bidder to the negotiating table.</li></ol>

Importance

The term “Poison Pill” is a significant business/finance term as it refers to a strategy used by companies to prevent or discourage hostile takeovers. A company that becomes the target of a hostile takeover implements a poison pill strategy to make its shares less attractive or more costly to the acquiring firm. This could involve allowing existing shareholders to buy more shares at a discount or issuing new shares that dilute the value of the acquired shares, making the takeover expensive or unattractive. The purpose is to protect the company’s independence and allow management and the board time to find alternatives to the hostile bid, safeguarding shareholders’ interests.

Explanation

The primary purpose of the “poison pill” strategy, a common tactic used in business and finance, is to ward off hostile takeover bids. This term refers to various mechanisms used by companies to discourage or deter unwelcome takeover attempts, essentially rendering the company less attractive to the potential acquirer. In essence, it’s like a self-defense mechanism that protects a company’s independence and safeguards the interests of its existing management and shareholders from predatory bidders.The term ‘poison pill’ stems from the idea that the company being targeted essentially swallows a ‘pill’ that could ‘poison’ the entity that attempts to acquire it. Implementation examples could include selling stock at a discount to existing shareholders (excluding the predator company) or buying back shares from the acquiring company at a higher price. These measures increase the cost of acquisition, making the process economically unfavorable for the hostile bidder, and therefore, help to maintain the attacking company at bay.

Examples

1. Netflix Poison Pill: Netflix is a good example. In 2012, Netflix adopted a poison pill strategy after investor Carl Icahn acquired a 10% stake in the company. The plan gave the shareholders the right to buy more stocks at a discounted price if any individual investor bought more than a 10% stake, thereby diluting the stake of the large investor and making the takeover more expensive.2. Airgas Inc.: In the realm of industrial gases, Airgas Inc. in 2010 used a poison pill to defend itself from a hostile takeover bid by Air Products and Chemicals Inc. Air Products had offered to buy Airgas at $70 per share, a deal value of $5.9 billion, but Airgas used the poison pill strategy to discourage the takeover, arguing it undervalued the company.3. Tribune Publishing: In 2016, Tribune Publishing Co., the owner of the Los Angeles Times, adopted a poison pill after Gannett Co., the biggest newspaper company in the U.S., made an unsolicited bid to acquire it. The poison pill approach ensured that Gannett would have to negotiate with Tribune’s board rather than buying shares on the open market to take over the company.

Frequently Asked Questions(FAQ)

What is a Poison Pill?

A Poison Pill is a strategy used by corporations to deter hostile takeovers. By making the company’s stock less attractive to the acquirer, poison pill strategies protect the company and its shareholders.

How does a Poison Pill work?

The most common type of poison pill allows shareholders to purchase more shares at a discount if one shareholder buys a certain percentage of the company’s shares. The increased number of shares dilutes the value of the stock, making the takeover more expensive and less attractive.

Are Poison Pills beneficial for the company’s shareholders?

Poison Pills protect existing shareholders by preventing hostile takeovers without their approval. Furthermore, they ensure that shareholders have a chance to respond to any unsolicited takeover bid.

Can a company remove the Poison Pill?

The management of the company has the power to remove a poison pill strategy, usually upon a majority vote from board members.

When was the Poison Pill tactic first used?

The poison pill defense tactic was first introduced in the 1980s as a response to the surge in hostile takeovers during that period.

What are some drawbacks of the Poison Pill strategy?

The Poison Pill strategy can limit bidding for the company thereby possibly preventing a premium offer for the company’s shares. Besides, it may entrench poor management by protecting them from being removed through a takeover.

Can a Poison Pill be used for purposes other than preventing hostile takeovers?

Although the primary purpose is to prevent hostile takeovers, some companies use poison pills to protect tax assets, such as net operating losses, that can be used to offset future taxable income.

What is the difference between a Poison Pill and a Golden Parachute?

A Poison Pill discourages hostile takeovers by diluting the stock’s value, making a takeover attempt more expensive. A Golden Parachute, on the other hand, is a clause in executives’ contracts ensuring hefty compensation for the executives if the company is taken over. Both are defensive strategies against hostile takeovers.

Related Finance Terms

  • Shareholder Rights Plan: Also known as the “poison pill strategy,” it’s a defensive strategy used by corporations to thwart hostile takeovers.
  • Hostile Takeover: This happens when an entity attempts to take control of a company against the wishes of the current management and board of directors.
  • White Knight: A friendly company or investor that acquires a corporation at fair consideration when it’s on the verge of a hostile takeover to ‘save’ it from the hostile bidders.
  • Flip-in Poison Pill: This type of defense allows existing shareholders, excluding the acquirer, to purchase additional shares at a discount, diluting the value of the acquired shares.
  • Flip-Over Poison Pill: In this scenario, shareholders have the option to purchase the acquirer’s shares at a discounted rate post-takeover, thereby diluting the acquirer’s shares.

Sources for More Information

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