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Fin 710

In: Business and Management

Submitted By kanu14
Words 1082
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1. Poison Pills are type of preventative defense installed to discourage an unwanted (hostile) takeover bid by another company. The target company attempts to make its firm (in terms of stock) less attractive (valuable) to the acquirer. In other words, they are provisions designed to make hostile takeovers too expensive.
When an outside company or individual acquirer acquires enough stock to gain a controlling interest in the target company, a poison pill is triggered. Hostile acquirer is not able to participate in this purchase of new shares. As a result of the inflow of new target shares (of which hostile acquirer was not able to purchase any), hostile acquirer’s ownership percentage is substantially diluted. Faced with such dilution, hostile acquirer has no choice but to give up its hostile approach. Shareholders other than hostile acquirer are able to buy newly-issued target shares at a substantial discount. If hostile acquirer wants to continue, it has only two practical choices: (1) negotiate with target since only target’s board has the power to redeem the poison pill; or (2) launch a proxy contest to gain control of target’s board of directors because, again, only target’s board has the power to redeem the poison pill. There are two types of poison pills: flip-in and flip-over. A flip-in allows existing shareholders (other than the hostile acquirer) to buy more shares at a discounted price. By purchasing more shares cheaply, 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. This is the tactic used by PeopleSoft against Oracle Corp. The flip-over allows shareholders to buy the acquirer’s shares at a discounted (reduced) price after the merger and thus makes the merger considerably more expensive. This type of strategy…...

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