Evaluating M&A

Deals-How Poison Pills

Work
Submitted to: Kannadas sir
Submitted by: Shraddha Tiwari-19049
PGDM
 Poison Pill Strategy
• A poison pill is a defense tactic utilized by a target company to
prevent or discourage hostile takeover attempts. Poison pills allow
existing shareholders the right to purchase additional shares at a
discount, effectively diluting the ownership interest of a new, hostile
party.
• Actual poison pill was used in Brown Forman vs. Lenox Takeover in
1983.
Reasons Poison Pills Were Adopted
Poison Pill Adoption

Stake change Routine Unsolicited offer

Activist Investor NOL Safeguard Friendly Merger
 Types of Poison Pills
• Flip-in Pill: Here the target company buys a large number of shares at a
discounted rate to counter the offer, which eventually leads to the dilution
of control of the acquirer.
• Flip-Over Pill: It generally happens when the shareholders choose to buy
shares in the acquirers’ company after the merger. Let's say the
shareholders of the target company exercise the option of buying two-for-
one shares in the merged company at a discount.
Advantages and Disadvantages of Poison Pill

• It is good for the stockholders of the target firm if they allow the target
company to force the acquiring firm to make higher offers for the
acquisition. It is a strong defence mechanism for a target company and
could lead to shareholders earning higher premiums if an acquisition is
favorable.
• It has the power to impact the shareholders value adversely. The flip leads
to more purchases at a lower share price and a large number of shares
impact its valuation.
 Companies that adopted Poison Pill
• Netflix adopted poison pill to fend off Carl Icahn by acquiring 10% stake
in the company.
• Gain capital adopted poison pill defence against FXCM hostile takeover.
• Lipton invented the poison pill defence during a takeover battle in Texas
back in 1982.
 Conclusion
• It all depends on the long term goals of both the companies.
Understanding how a company responds to hostile takeovers with the
poison pill or other defence can reveal greater truths about the company
that how does it tackles critical issues pertaining to the management and
itself.
Thank You