Poison pill
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Poison pill originally meant a literal poison pill (often a glass vial of cyanide salts) carried by various spies throughout history, and by Nazi leaders in WWII. Spies could take such pills when discovered, eliminating any possibility that they could be interrogated for the enemy's gain. It has since become a term referring to any strategy, generally in business or politics, to increase the likelihood of negative results over positive ones for anyone who attempts any kind of takeover.
[edit] Business
In business, poison pills are often used to avoid takeover bids. Takeover bids are attempts by a potential acquirer to obtain a controlling block of shares in a target company, and thereby gain control of the board and, through it, the company's management. There are several types of "poison pills" that can be planned by a company that thinks it may be the target of a takeover by a potential acquirer, but the conventional poison pill is now a shareholder rights plan.
[edit] Shareholder Rights Plans
The target company issues rights to existing shareholders to acquire a large number of new securities, usually common stock or preferred stock. These new rights usually allow holders (other than an acquirer) to convert the right into a large number of common shares if anyone acquires more than a set amount of the target's stock (typically 10-20%). This immediately dilutes the percentage of the target owned by the acquirer, and makes it more expensive to acquire control of the target. This form of poison pill is sometimes called a shareholder rights plan because it is intended to give management (and possibly shareholders) the right to approve an acquisition, potentially requiring the acquirer to pay a premium for control of the target. Because the board of directors of the company can redeem or otherwise eliminate a standard poison pill, it does not typically block or impede a proxy fight or other takeover not accompanied by an acquisition of a significant block of the company's stock.
[edit] Other tactics
"Poison pill" is also used more broadly to describe other types of takeover defenses that involve the target taking some action that harms both target and bidder:
- The target adds to its charter a provision which gives the current shareholders the right to sell their shares to the acquirer at an increased price (usually 100 % above recent average share price), if the acquirer's share of the company reaches a critical limit (usually one third). This kind of poison pill cannot stop a determined acquirer but ensures a high price for the company.
- The target takes on large debts in an effort to make the debt load too high to be attractive - the acquirer would eventually have to pay the debts.
- The company buys a number of smaller companies using a stock swap, diluting the value of the target's stock.
- The target grants its employees stock options that immediately vest if the company is taken over. This is intended to give employees an incentive to continue working for the target company at least until a merger is completed instead of looking for a new job as soon as takeover discussions begin. However, with the release of the "golden handcuffs", many discontent employees may quit immediately after they've cashed in their stock options. This poison pill may create an exodus of talented employees. In many high-tech businesses, attrition of talented human resources often means an empty shell is left behind for the new owner.
- Peoplesoft guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle Corporation, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their Peoplesoft software licenses. The hypothetical cost to Oracle was valued at as much as US$1.5 billion. The move was opposed by some Peoplesoft shareholders who believed the refund guarantee flagrantly opposed their interests as shareholders. Peoplesoft allowed the guarantee to expire in April 2004.
- The practice of having staggered elections for the Board of Directors. For example, if a company had nine directors, then three directors would be up for re-election each year, with a three-year term. This would present a potential acquirer with the position of having a hostile board for at least a year after the first election. In some companies, certain percentages of the board (33%) may be enough to block key decisions (such as a full merger agreement or major asset sale), so an acquirer may not be able to close an acquisition for years after having purchased a majority of the target's stock.
[edit] History
The poison pill was invented by noted M&A lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz, in 1982, as a response to tender-based hostile takeovers[1]. Poison pills became popular during the early 1980s, in response to the increasing trend of corporate raids by businessmen such as Carl Icahn. Although the legality of poison pills was unclear for some time, they were upheld as a valid instrument of Delaware corporate law by the Delaware Supreme Court in its November 1985 decision Moran v. Household International, Inc.
It was reported in 2001 that since 1997, for every company with a poison pill that successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers.[2] The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since, despite the above statistic, poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.
[edit] Common types
- Preferred stock plan
- Flipover rights plan
- Ownership flip-in plan
- Back-end rights plan
- Voting plan
[edit] Sports
In professional sports, a poison pill is a component of a contract, which one team offers a player, that makes it difficult or impossible for another team (which has the right of first refusal) to match. While it can often refer to a salary structure or clause that would affect all teams equally, it has taken on a new specific meaning of a clause that has unbalanced impact. For example, in March 2006, the Minnesota Vikings offered Steve Hutchinson, an offensive guard on the Seattle Seahawks, a 7 year, $49 million contract of which $16 million was guaranteed. This contract offer had two poison pills in it. One was the salary structure, which would require the team to pay $13 million in the first year of the contract. That salary structure would apply to both teams equally, as the Seahawks would also have to pay $13 million in the first contract year, were they to match the offer. The second was a clause that required Hutchinson to be the highest paid player on the offensive line, or else the entire contract would be guaranteed. Since the Seahawks had another offensive lineman with a higher salary and the Vikings did not, this clause would have required the Seahawks to guarantee $49 million, and it effectively eliminated the Seahawks' opportunity to match the contract offer. In the wake of this contract offer, similar clauses have appeared in other contract offers (including, ironically, a contract offered to Vikings wide receiver Nate Burleson by the Seahawks), and the term poison pill has come to be more closely identified with the asymmetrical-impact clause.
[edit] Politics
A poison pill may also be used in politics, such as attaching an amendment so distasteful to a bill that even the bill's supporters are forced to vote against it. This manipulative tactic may be intended to simply kill the bill, or to create a no-win situation for the bill's supporters, so that the bill's opponents can accuse them of voting for something bad no matter what.
In the U.S., it may also refer to a stipulation often attached to constitutional amendments, which kills the amendment if it has not been ratified after seven years.
[edit] See also
[edit] External links
- Institute of Mergers, Acquisitions and Alliances (MANDA) M&A An academic research institute on mergers & acquisitions, incl. takeover battles & poison pills
