'Poison Pill Strategy' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Among the best defensive mechanisms for companies who are being unwontedly pursued by acquiring companies on the prowl is the colorfully but appropriately named poison pill strategy. Poison pill refers to a strategy whereby targeted companies are able to effectively discourage or outright prevent a hostile takeover. Companies which are targeted for such a takeover employ this type of a poison pill defense in order to help their stock shares appear undesirable to the firm pursuing the acquisition.
Two different forms of poison pill strategy exist. The “flip-in” permits the stock’s shareholders to buy more shares of stock for a discounted price. The only parties not allowed to participate in this maneuver are the acquiring company. This particular strategy gives the company investors immediate profits. It also serves the primary purpose of diluting the stock shares that the acquiring company holds. It makes the takeover effort considerably more difficult and costly, most importantly.
The “flip-over” strategy allows share holders to buy shares of the acquiring company for a discounted price once the merger has transpired. As an example, the shareholders might obtain the ability to purchase the acquirer’s stock in later mergers for a two shares for one special deal.
This phrase poison pill strategy is the common man’s expression for a particularly set up shareholder rights plan. These unique defensive strategies that a company’s board of directors creates make hostile takeover parties pause for thought. In their most successful application, a poison pill strategy can defeat potential takeovers completely.
The famed poison pill strategy was first designed and employed to fight off unwanted mergers and acquisitions back in the first years of the corporate raiding 1980s heydays. At this time, corporations needed to devise a means of short circuiting takeover firms and funds from directly arranging share price takeover with the stakeholders rather than forcing them to deal directly with the appropriate party the company’s board of directors.
These plans of shareholders rights are commonly distributed by the company board as an option or warrant connected with pre-existing stock shares. Such poison pill plans may only be cancelled out by a decision of the board itself. Though there are two different types of poison pills in existence, the flip-in form proves to be by far and away the most typical.
Flip-in’s like these are generally established with a triggering mechanism clause. The clause will state that if a single share holder purchases a greater amount than a pre-set percentage, pre-existing shareholders will be allowed to purchase more stock shares at a discounted cost. An example of this flip-in strategy might be triggered at 30% of the company stock. When this threshold is met, all shareholders less the one who just bought the 30% stake are allowed to buy into a new class of shares for the discounted price.
The more shareholders who choose to exercise their rights to purchase additional shares, the greater the dilution of the bidding company’s interest proves to be, resulting in a greater ultimate price for the acquirer to pay for the bid. When bidding outfits know there are these types of poison pill strategies that can be tripped, they are far more likely to pass on a hostile takeover. Instead, they will discuss their interest amicably with the board of directors of the company, the way which companies prefer to do business.