Dear Rakeshji,
There are many poison pill strategies that have been used by companies against hostile takeovers and corporate raiders. For example, offering a preferred stock option to current shareholders allows them to exercise their purchase rights at a huge premium to the company, making the cost of the acquisition suddenly unattractive. Another method is to take on a debt that would leave the company overleveraged and potentially unprofitable.
Some companies have created employee stock ownership plans that vest only when the takeover is finalized. In addition to a dilution of the stock value, such employee benefits may result in an employee exodus from the company leaving it without its talented workforce (which is often one of the drivers of the acquisition).
An extreme implementation of a poison pill is called a suicide pill.
The poison pill is primarily of two types:
- A ‘’flip-in’’ allows existing shareholders (except the acquirer) to buy more shares in the target company at a discount, upon the mere accumulation of a specified percentage of stock by a potential acquirer. By purchasing the shares cheaply, investors get instant profits and, more importantly dilute the shares held by the competitors. As a result, the competitor’s takeover attempt is made more difficult and expensive. Internet major Yahoo! adopted this form of poison pill in 2000 allowing the board to issue upto 10 million shares on new stock in the event of an acquisition offer on the table that they did not want to endorse (like that of Microsoft) and each share cane have nearly unlimited voting power. Furthermore, they entitled every director to cash in all of their outstanding stock options which amounted to about 16 million potential new shares. This defence made it practically impossible for Microsoft to proceed with a hostile bid after Yahoo! expressed its unwillingness towards Microsoft’s offer for Yahoo! and ultimately resulted in the withdrawal of the same.
- A ‘’flip-over’’ allows stockholders to buy the acquirer’s shares at a discounted price after the merger. The holders of common stock of a company receive one right for each share held, bearing a set expiration date and no voting power. In the event of an unwelcome bid, the rights begin trading separately from the shares. If the bid is successful, all shareholders except the acquirer can exercise the right to purchase shares of the merged entity at discount. For instance, the shareholders have the right to purchase stock of the acquirer on a 2-for-1 basis in any subsequent merger. The significant dilution in the shareholdings of the acquirer makes the takeover expensive and sometimes frustrates it. If the takeover bid is abandoned, the company might redeem the rights.
Regards,
Veeral Gandhi
CAclubindia
