A poison pill is a tactic utilized by companies to prevent or discourage hostile takeovers. A company targeted for a takeover uses a poison pill strategy to make shares of the company’s stock unfavorable to the acquiring firm.
What is a ‘Poison Pill’
A poison pill is a tactic utilized by companies to prevent discourage hostile takeovers. A company targeted for a takeover uses a poison pill strategy to make shares of the company’s stock unfavorable to the acquiring firm.
There are two types of poison pills:
- A “flip-in” permits shareholders, except for the acquirer, to purchase additional shares at a discount. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.
- A “flip-over” enables stockholders to purchase the acquirer’s shares after the merger at a discounted rate. For example, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.
Poison Pill Example
Flip-in poison pills may hold an attached option that permits shareholders to buy additional discounted shares if any one shareholder buys more than a certain percentage, or more, of the company’s shares. For example, a flip-in poison pill plan is triggered when a shareholder buys 25% of the company’s shares. When it is triggered, every shareholder, excluding the holder who purchased 25%, is entitled to buy a new issue of shares at a discounted rate. The greater the number of shareholders who buy additional shares, the more diluted the bidder’s interest becomes and the higher the cost of the bid. If a bidder is aware such a plan could be activated, it may be inclined not to pursue a takeover without board approval.
A bear hug is an offer made by one company to buy the shares of another for a much higher per-
share price than what that company is worth. A bear hug offer is usually made when there is
doubt that the target company’s management is willing to sell.
The name “bear hug” reflects the persuasiveness of the offering company’s overly generous offer
to the target company. By offering a price far in excess of the target company’s current value, the
offering party can usually obtain an agreement. The target company’s management is essentially
forced to accept such a generous offer because it is legally obligated to look out for the best
interests of its shareholders.
A bear hug can be interpreted as a hostile takeover attempt by the company making the offer, as it is designed to put the target company in a position where it is unable to refuse being acquired.
Unlike some other forms of hostile takeovers, a bear hug often leaves shareholders in a positive financial situation. The acquiring company may offer additional incentives to the target company to increase the likelihood that it will take the offer.
To qualify as a bear hug, the acquiring company must make an offer well above market value for a large number of a company’s shares. Since the target company is required to look out for the best interest of its shareholders, it is often required to take the offer seriously even if there was no previous intention to change the business model or previous announcement of looking for a buyer.
At times, bear hug offers may be made to struggling companies or startups in hopes of acquiring assets that will have stronger values in the future, though companies that do not demonstrate an financial needs or difficulties may be targeted as well.
Dr. Kirti Miglani Assit Prof TIAS India