Posted in Marketing and Strategy Terms, Total Reads: 1263
Definition: Poison Pill
A poison pill is an anti-takeover strategy used to prevent hostile takeovers or corporate raiding and aims at making the transaction being pursued by a hostile bidder extremely unattractive from an economic perspective. It derives its name from the cyanide pill that secret government agents are said to be instructed to swallow if capture is imminent.
The Poison pill provision entrusts existing shareholders (except the hostile suitor) to purchase the targeted stocks at a price significantly lower than the market price resulting in the dilution of the economic interests of the suitor by making the target economically unattractive and impractical.
To pursue this provision, it is essential that the same is incorporated in the company’s charter and is triggered by events specified therein such as the announcement of a cash tender offer or the acquisition by an outsider of a specified percentage of the target's shares.Currently, the most widely used poison pills are "call plans" that combine the features of “Flip in” (right to purchase additional shares of the company) and “Flip over”(right to acquire shares of the acquirer).