Poison Pill Strategy

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After my post on “Why Companies Make Acquisitions” an attorney friend of mine and I engaged in an interesting conversation regarding the poison pill strategy. Some of which I would like to share with you.

The term poison pill refers to a strategy employed by a company to avoid a hostile or unwanted takeover.  This strategy can take any form desired by the target.  However, the best poison pill strategies typically result in the least amount of venom or poison left within the target company once the takeover attempt is thwarted.

In my 12/7/07 post my poison pill strategy involved the target of a hostile takeover acquiring a less desirable company in an effort to diminish its value in the eyes of the aggressor.  Although definitely a poison pill strategy, it is highly uncommon due to the damage inflicted on the target as a going concern post-takeover attempt.

Two examples of common, less poisonous but equally effective poison pills are:

  • A Shareholder Rights Plan
  • A Staggered Board of Directors

A shareholder rights plan gives current shareholders of the company the option to purchase additional shares if a group (or an individual shareholder) acquires a controlling interest (or a substantial number of shares) that threaten control in the company.  When the existing shareholders exercise their options, the shares of the individual or group attempting to gain control become diluted and the takeover attempt, although not halted, becomes significantly more expensive.  The acquirer must now purchase significantly more shares to regain a substantive stake in the company.  If implemented properly, the cost of acquiring these shares will raise to cost of the purchase to a point where a controlling interest is no longer attractive to the acquirer.

Another very common poison pill strategy is to maintain a staggered term of appointment to the board of directors.  By staggering the terms of the individual members (one year term, two year, three year, etc.) and equally segmenting the board (example:  1/3 one year members, 1/3 two year members, 1/3 three year members) it would take a hostile acquirer a minimum of two years to successfully gain control of the board.  By maintaining board control over an extended period of time additional poison pill strategies can be implemented to derail the takeover attempt.  The board may aggressively accumulate debt, implement the discussed shareholders rights plan or make “poison pill” acquisitions, etc.

There are an innumerable number of poison pill strategies limited only by one’s imagination.  However, the key to a good poison pill strategy is to limit the amount of poison remaining in the company once the takeover attempt has diminished.  If the poison is too potent, you may win the battle against the hostile acquirer but you may lose the war of sustainability.