A Business Encyclopedia

Poison Pill

Definition: The Poison Pill is the anti-takeover tactic adopted by the firm to discourage a hostile takeover, by making the stock unfavorable for the corporate raider, who has given the hostile bid.

Poison Pill Strategies

  1. Flip in: This strategy enables the existing shareholders of the target company to buy additional shares at a high discount rate. This poison pill is effective when the acquiring firm holds more than 20% share of the target firm’s stock and occurs before the merger has been finalized.
  2. Flip Over: This strategy offers the existing shareholders of the target company to buy additional shares of a new company (so formed after the merger) at substantial discount rates.
  3. Preferred stock plans: There is a preferred stock registered with the securities and exchange commission against which the common shareholders get dividends. There is a special clause that preferred stock can be converted into the common stock after the takeover. Therefore, such poison pill increases the cost of merger and dilutes the ownership of the acquiring company.
  4. Poison Puts: These are the special bonds given to the investors who can realize cash against these anytime before their maturity. If the target firm is engaged in the takeover attempts, then the acquiring company would have an immense pressure to arrange the fund to pay off the put owners.
  5. Back-end Plans: This strategy enables the existing shareholders of the target company to convert their debts into cash at the price pre-determined by the management of the company. By doing so, the takeover is made much more expensive and unfavorable for the acquiring firm.

Thus, the target firm can choose either of the poison pill strategies to make the hostile takeover highly expensive or unfavorable.

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