An anatomy of the poison pill

18 03 2008

I teach a Business English course to second year Business Engineering students at Ghent University. During last week’s class, I tried to explain the intricacies of the flip-in and flip-over poison pill tactic. Blank stares ensued. Then a couple of questions. More blank stares, this time on my part. Let’s try to set the record straight here.

A poison pill is a defensive strategy designed to discourage hostile takeovers by increasing the takeover cost. Investopedia distinguishes two main types (Wikipedia lists five):

1. A “flip-in” allows existing shareholders (except the acquirer) to buy more shares at a discount.

2. The “flip-over” allows stockholders to buy the acquirer’s shares at a discounted price after the merger.

According to MacMinn & Cook (1991: 492), the effect of both tactics is “to increase the payoff to the target’s shareholders at the raider’s expense.” A flip-in tactic is triggered when the acquirer purchases 20% of the target company’s shares (or when a 30-50% tender offer is made). Upon activation of flip-in rights, current shareholders (excluding the hostile acquirer) are allowed to purchase target shares at below market price in order to reduce the value of the raiding firm’s position. Conversely, a flip-over strategy applies when 100% of the target company’s shares are purchased. In this event, existing target shareholder rights “flip-over”, allowing holders to purchase discounted shares in the surviving firm, thereby diluting the acquirer’s value. Right, any questions (ahum)?

Source: Richard D. MacMinn & Douglas O. Cook (1991) An Anatomy of the Poison Pill. In: Managerial and Decision Economics, Vol. 12, No. 6, pp. 481-487.

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