Definition
A flip-over poison pill is a strategy used by companies to prevent hostile takeovers. It allows existing shareholders the right to purchase additional shares at a discounted price from the acquirer after the takeover. The sudden increase in the number of shares dilutes the value, making the takeover more expensive and less appealing to the acquirer.
Key Takeaways
- The flip-over poison pill is a strategy used by corporations to deter hostile takeovers. This strategy comes into effect when a hostile bidder acquires a given percentage of company shares, triggering a rights plan that allows existing shareholders to buy more shares at a discount.
- It serves to dilute the share value of the acquirer, thereby making the takeover more expensive and less attractive. This tactic helps to protect the interests of the existing shareholders and the company’s management and board.
- The flip-over poison pill strategy can discourage potential hostile bidders, giving the target company more control over its future. However, it can also deter some shareholders who might favor the takeover or limit the company’s potential for growth.
Importance
The finance term, Flip-Over Poison Pill, is important as it serves as a defensive strategy companies utilize to avoid hostile takeovers.
When a company is faced with the risk of an unwelcome takeover bid, it deploys this mechanism to make the acquisition financially unappealing or even self-destructive, hence the term ‘poison pill.’ Under the flip-over scheme, existing shareholders, excluding the bidder, are permitted to buy additional stocks at a discounted rate, thereby diluting the acquirer’s stake and mitigating their control over the company.
This tactic not only preserves the company’s autonomy but also empowers the existing shareholders, making the flip-over poison pill a key instrument in corporate finance.
Explanation
The flip-over poison pill is a strategy employed by public companies to discourage hostile takeovers. Its purpose revolves around defending the interests of the existing management and shareholders while keeping potential hostile takeover entities at bay.
When an unauthorized entity attempts to acquire a significant portion of the company shares (a percentage typically specified in the poison pill agreement), the flip-over poison pill provision gets triggered, effectively making the takeover prohibitively expensive and hence, much less appealing. This strategy works as follows: When the unwanted suitor acquires a previously determined percentage of shares, existing shareholders are granted the right to purchase additional shares at a heavily discounted price.
However, the key lockdown is that the rights do not extend to the new acquirer. This sudden increase in available shares for other investors dilutes the acquirer’s stake in the company, making the takeover significantly more expensive and less likely.
Thus, the flip-over poison pill serves as a defensive—and often effective—measure against potentially undermining hostile takeovers.
Examples of Flip-Over Poison Pill
A “flip-over” poison pill is a strategy used by publicly traded companies to thwart hostile takeovers. When a company becomes a takeover target, current shareholders are granted the right to purchase shares from the would-be acquirer at a significant discount, diluting the acquirer’s stake and making the takeover more expensive. Here are three real world examples:
Airgas Inc.: To protect itself from a hostile takeover attempt by Air Products and Chemicals Inc in 2010, Airgas adopted a poison pill defense, which allowed its shareholders to buy more stocks at a discount if any one investor’s stake exceeded 20%. The strategy was effective as Air Products eventually withdrew its takeover bid.
Netflix in 2012: When activist investor Carl Icahn acquired a 10% stake in Netflix, the company activated its poison pill plan, giving existing shareholders the right to acquire more shares at a discount if any one shareholder’s stake exceeded 10%. This strategy effectively diluted Icahn’s stake and made a potential takeover prohibitively expensive.
Sotheby’s in 2013: To fend off a potential hostile takeover from hedge fund Third Point LLC, Sotheby’s implemented a poison pill provision. This allowed existing shareholders to buy more shares at a discount in the event any single shareholder acquired more than 10% of the company. The strategy succeeded in preventing a takeover; Third Point eventually sold most of its stake in the company.
FAQs for Flip-Over Poison Pill
What is a Flip-Over Poison Pill?
A flip-over poison pill is a defensive strategy used by corporations to deter hostile takeovers. If a company is taken over, this strategy allows the existing shareholders to buy more shares at a discount, effectively diluting the stake of the new, acquiring company.
How does a Flip-Over Poison Pill work?
When a company is acquired or merged, existing shareholders have the right to purchase more shares at a discounted price. This dilutes the shares of the incoming company, making the takeover more expensive and less attractive.
What is the purpose of a Flip-Over Poison Pill?
The main purpose of a flip-over poison pill is to protect the company from hostile takeovers. By making the takeover more expensive, it deters potential acts of aggression from other companies.
Is a Flip-Over Poison Pill beneficial for shareholders?
The benefits to shareholders can vary. While it can deter hostile takeovers and potentially lead to a higher sell price, it can also limit the control shareholders have over any takeover activities and the future direction of the company.
Are there any drawbacks to using a Flip-Over Poison Pill?
While it can protect a company from a hostile takeover, it can also limit shareholder control and can often lead to a decrease in share price due to dilution. Also, its usage can send a negative signal to the market.
Related Entrepreneurship Terms
- Takeover Defense: A strategy used by corporations to prevent or discourage hostile takeovers. Flip-over poison pill is one such defense strategy.
- Rights Plan: Also known as a shareholder rights plan, this is often used in a flip-over poison pill strategy, where shareholders are given rights to purchase stocks at a discounted price in the event of a hostile takeover.
- Trigger Event: This is a particular action or event that initiates the flip-over poison pill, typically a hostile takeover by another company.
- Flip-In Poison Pill: A type of poison pill strategy similar to flip-over. The flip-in allows existing shareholders to buy more shares at a discount, diluting the value of the acquired shares in a hostile takeover.
- Shareholder Activism: It refers to the attempts by shareholders to influence a company’s behavior. This can be a catalyst for implementing a flip-over poison pill strategy.
Sources for More Information
- Investopedia: An extensive online resource dedicated to investing and finance, which includes articles, definitions, and guides on a wide variety of topics, including Flip-Over Poison Pill.
- The New York Times: The business and finance section of this renowned newspaper often includes articles and coverage on strategic defenses used by companies, including Flip-Over Poison Pill.
- The Financial Times: A UK-based international daily newspaper with a special emphasis on business and economic news worldwide. The website includes detailed definitions and articles related to finance terms such as the Flip-Over Poison Pill.
- Bloomberg: Provides business and market news, data, analysis, and video to the world, featuring stories from Businessweek and Bloomberg News. It can be a useful resource for understanding the Flip-Over Poison Pill in a practical, real-world context.
