Poison Finance: A Dangerous Game

Poison finance refers to strategies employed by companies, typically those facing a hostile takeover attempt, to make themselves less attractive to the acquiring entity. These tactics aim to increase the target company’s cost, complexity, and overall risk, deterring the potential acquirer from proceeding with the bid.

The most well-known example of poison finance is the “poison pill,” formally known as a shareholder rights plan. This mechanism grants existing shareholders (excluding the acquiring entity) the right to purchase additional shares of the company at a heavily discounted price if an acquirer triggers a specific ownership threshold, usually between 10% and 20%. This dramatically dilutes the acquiring company’s ownership and increases the overall cost of the takeover, making it far less appealing. There are two primary types of poison pills: flip-in pills, which allow existing shareholders to buy shares in the target company at a discount, and flip-over pills, which allow existing shareholders to buy shares in the acquiring company after the merger at a discount.

Beyond poison pills, other poison finance techniques include:

• Crown Jewel Options: Selling off or granting options on the company’s most valuable assets (“crown jewels”) to a friendly third party (“white knight”). This deprives the acquirer of the primary reason for the takeover, making the remaining company significantly less desirable.
• Leveraged Recapitalization: Taking on significant debt to pay a large dividend to shareholders. This increases the target company’s financial burden, making it a less attractive acquisition target due to the increased risk and diminished profitability.
• Litigation: Launching lawsuits against the acquiring company, alleging antitrust violations or other legal issues. This can delay the takeover process, increase legal expenses for the acquirer, and potentially result in unfavorable rulings that scuttle the deal.
• Pac-Man Defense: Launching a counter-offer to acquire the acquiring company itself. This aggressive tactic forces the acquirer to defend against a takeover, potentially exhausting their resources and diverting their attention from the initial acquisition attempt.

While poison finance strategies can be effective in protecting a company from a hostile takeover, they also have potential drawbacks. They can entrench management, even if the takeover bid would be beneficial to shareholders. By deterring potential acquirers, poison pills can reduce shareholder value in the long run. Furthermore, the use of these tactics can signal to the market that management is prioritizing their own interests over those of shareholders, which can damage the company’s reputation and stock price.

Ultimately, the decision to employ poison finance strategies is a complex one that should be carefully considered by the board of directors. It requires a thorough assessment of the potential benefits and risks, as well as a clear understanding of the company’s strategic objectives and the interests of its shareholders. Transparency and open communication with shareholders are crucial when implementing these defensive measures to avoid accusations of entrenchment and ensure that the board is acting in the best interests of the company as a whole.

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