Poison Pill

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.

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Poison Pill

An antitakeover measure stipulating that shareholders on the receiving end of a hostile takeover may buy shares in their own company at a price below fair market value. Once the acquisition is complete, the provision allows these same shareholders to buy more shares in the new company for below market value. This forces shareholders in the acquiring company to suffer a devaluation and dilution of their own shares. This is done to discourage hostile takeovers among the shareholders of the acquiring companies. It is important to note that a poison pill need not use both of these tactics; sometimes it utilizes only one or the other.

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Poison Pill

What Does Poison Pill Mean?

A defensive strategy used by a corporation to discourage a hostile takeover by another company. Poison pills are used to make the target company 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) A flip-over allows stockholders to buy the acquirer's shares at a discounted price after the merger.

Investopedia explains Poison Pill

(1) When more shares are purchased cheaply (flip-in), they dilute the shares held by the acquiring company. As a result, the competitor's takeover attempt is made more difficult and expensive. (2) An example of a flip-over occurs 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 that it uses equity rather than bonds.

Related Terms:
• Common Stock
• Merger
• Mergers and Acquisitions—M&A
• Shareholders' Equity
• Takeover