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Poison Pill

A strategy used by corporations to discourage a hostile takeover by another company. The target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills:

1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount.

2. The "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.

Notes:

1. By purchasing more shares cheaply (flip-in), investors get instant profits and, more importantly, they dilute the shares held by the competitors. As a result, the competitor's takeover attempt is made more difficult and expensive.

2. An example of a flip-over is when shareholders have the right to purchase stock of the acquirer on a 2-for-1 basis in any subsequent merger.

This is similar to the macaroni defense, except it uses equity rather than bonds.

See also: Bankmail, Blank Check Preferred, Greenmail, Lady Macbeth Strategy, Lobster Trap, Macaroni Defense, Pac-man, Participating Preferred Stock, People Pill, Scorched Earth Policy, Share Purchase Right, Shark Repellent, Suicide Pill

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Poison pill

Anti-takeover device that gives a prospective acquiree's shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the cyanide pill that secret government agents are said to be instructed to swallow if capture is imminent.

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poison pill

An antitakeover tactic in which warrants are issued to a firm's stockholders, giving them the right to purchase shares of the firm's stock at a bargain price in the event that a suitor hostile to management acquires a stipulated percentage of the firm's stock. The poison pill is intended to make the takeover so expensive that any attempt to take control will be abandoned. See also flip-over pill, Jonestown defense, macaroni defense, suicide pill.