Poison pill tactics

Poison pill tactics are defensive strategies used by companies to prevent or discourage hostile takeover attempts.
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Updated: Jun 20, 2024

3 key takeaways

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  • Poison pill tactics are designed to make a company less attractive to potential acquirers.
  • They often involve issuing new shares or rights that dilute the value of a takeover bid.
  • These tactics can protect a company’s existing management and shareholders from unsolicited acquisition attempts.

What are poison pill tactics?

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Poison pill tactics are a set of strategies employed by a company to thwart hostile takeovers. When a company faces an unsolicited bid from another company or investor seeking to gain control, it can implement these measures to make the takeover less appealing or more difficult to achieve.

The primary goal is to protect the company’s management and existing shareholders from losing control and to give the board time to evaluate the offer and explore other alternatives.

Types of poison pill tactics

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  • Flip-In Poison Pill: This tactic allows existing shareholders (except the acquirer) to purchase additional shares at a discount. This dilutes the ownership interest of the acquirer, making the takeover attempt more expensive and less attractive. For example, if an acquiring company buys 20% of the target company’s shares, the flip-in poison pill may be triggered, allowing other shareholders to buy shares at a significant discount.
  • Flip-Over Poison Pill: In the event of a successful takeover, the flip-over poison pill permits shareholders to purchase the acquiring company’s shares at a discounted rate. This can make the merger less attractive to the acquirer as it dilutes their share value post-acquisition.
  • Preferred Stock Plan: The company issues preferred shares that come with special rights, such as high dividends or conversion options into common stock. These shares are usually issued to friendly investors or insiders who support the current management, making it difficult for the hostile bidder to gain a majority.
  • Voting Plan: This involves issuing shares with special voting rights to existing shareholders, effectively consolidating voting power among friendly parties. This can prevent the hostile bidder from securing the votes needed to gain control of the board of directors.
  • People Pill: A more drastic measure, the people pill involves the company’s top executives resigning en masse if a hostile takeover is successful. This leaves the acquiring company without experienced leadership, potentially deterring the takeover attempt.

Implementing poison pill tactics

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The board of directors typically approves poison pill tactics, and they can be implemented through corporate bylaws or shareholder rights plans. These measures often require the approval of a majority of existing shareholders.

The effectiveness of poison pill tactics depends on the company’s specific circumstances and the determination of the acquirer.

Pros and cons of poison pill tactics

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Pros

  • Protects existing management and shareholders from losing control.
  • Gives the board time to consider alternative offers or strategic plans.
  • Can deter undervalued or opportunistic takeover attempts.

Cons

  • May entrench existing management and reduce accountability.
  • Can be seen as a tactic to avoid shareholder value maximization.
  • Potentially leads to legal challenges and shareholder opposition.

Real-world examples

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  • Netflix: In 2012, Netflix adopted a poison pill plan to prevent activist investor Carl Icahn from gaining a controlling interest. The plan allowed shareholders to purchase additional shares if any single investor acquired 10% or more of Netflix’s stock, effectively diluting Icahn’s stake and discouraging further accumulation.
  • Papa John’s: In 2018, Papa John’s implemented a poison pill plan after its founder, John Schnatter, tried to regain control of the company. The plan allowed existing shareholders to buy additional shares at a discount if Schnatter increased his ownership beyond a certain threshold, thus diluting his influence.

Poison pill tactics are a crucial part of corporate defense mechanisms. They enable companies to protect themselves from hostile takeovers, ensuring that any acquisition attempt is in the best interest of the company and its shareholders.

To delve deeper into corporate governance and defensive strategies, consider exploring topics like shareholder rights plans, hostile takeovers, and corporate governance practices.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.