Evaluating Merger and Acquisitions

deals – How Poison Pills Works

Submitted to: Prof. Kannadas S

Submitted by:
Anuj Sohani – 19010
Date: 5/12/20
Introduction and History

• Poison Pill also called as Shareholder’s Right Plan

• Defensive Tactic – Antitakeover Amendment used Against Hostile Takeover
• Target Company make itself less desirable
• Provides their Shareholders special rights which gets exercisable after the
triggering event
• In 1980s Corporate Raiders like T Boone & Carl were in full momentum
• They went on to take over “General American Oil”
• The client of the company invented Poison Pill in 1982
 Mechanism of Poison Pill

• Target Company gives existing shareholders right to buy stock at a price lower
than market price or to sell shares at premium in the triggering event
• There are amendments in AOA, which makes it challenging for an acquirer
even after takeover
• E.g. Provision in AOA to not use Brand Name
Example of Poison Pill

• Target Company having 3,00,000 outstanding shares

• Poison Pill- when acquiring company reaches 20% of shareholding (triggering
event), existing shareholder can buy shares at 50% dis.
• Market Price of Share Rs. 100
• If acquirer gets 60,000 shares (i.e. 20%*3,00,000)- poison pill will get
activated
• Now, 3,00,000-60,000= 2,40,000 shares will be issued in the market
• New Outstanding shares 3,00,000+2,40,000=5,40,000
• Acquirer shareholding 60,000/5,40,000*100=11.11%
Two Imp Variety of Poison Pill

1. Flip-in Poison Pill

• Gives Right to the existing/non hostile shareholder to buy the shares at a
bargained price ( lower than market price )
• Aim is to dilute the bidders shareholding and thereby to increase the
cost of control
• This results in withdrawing the offer or amend the offer
2. Flip-over Poison Pill
• Gives right to the shareholders of target company to purchase the shares
of acquiring company (new entity) at a deeply discounted price when
the takeover is successful
“Both the strategies are not mutually exclusive”
Two tier Tender Offer

• Acquirer offers a good deal to the target company for a specific no of

shares, to obtain control and for remaining shares a low offer .
• Example- Rs 100 for specific no of shares to get the control & Rs 70 for
remaining no of shares
Avoiding Poison Pill

• Poison Pills can be avoided by having a close watch in the actions of target
company – new securities, extraordinary dividends, shareholders right plan
• Legal concerns – Poison Pills are adopted by Board of directors without
shareholders approval
Thank You