Strategies Used To Unwanted Takeover

Strategies Used To Unwanted Takeover

Understanding Poison Pill

Sometimes when companies face a takeover there are chances that it might an unwanted takeover known as hostile takeovers, in order to prevent such takeovers or discouraging this type of takeovers is done by using a tactic known as a poison pill. Learn more about different tactics used in trading. The strategy that is used by the company that is about to face takeover utilizes a poison pill where the shares of the target firm’s stock are made unfavorable so they cannot be acquired by the firm that is an acquirer.

There is a shareholder rights plan that has been designed particularly and the phrase poison pill is commonly used informal expression that refers to the same. Generally, the poison pill is of two types:

  • Flip-in poison pill: This type of poison pill will give permission to shareholders to buy shares in addition to their previous shares at a discount price however the acquirer is not allowed to do so. This will offer to the people who have invested a profit that is instant. There is dilation of the shares that the acquiring firm’s shareholders by making use of this poison pill type. Therefore, this will result in the attempt made to a takeover by the acquirer very expensive and it will be very difficult to achieve this.
  • Flip-over poison pill: This type of poison pill will allow the shareholders to buy the share of the acquirer at a discount price however, they can do so only after the merger. We can consider an example where a stockholder might obtain the right to purchase the shares of its acquiring company following a merger and the price they will be paying is for two shares they will pay the cost of only one.

Poison Pill’s History

It was in the early 1980s the idea of poison pills were initiated with regards to mergers and acquisitions.  In order to put an end to the bidding of the target companies being negotiated directly for a price so that shares should be sold with the stakeholders, these were designed. This would compel the bidders to do the negotiation with the board of directors.

The board of directors will issue the shareholder rights plans either in the form of warrant or to the shares that they already have these are, the options are added. The shareholder rights plans and poison pills can be canceled only by the board of directors. The very commonly used from the two types of poison pills is the flip-in type.

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