The Basics of Poison Pill or People Pill Strategies

The early 1960s saw the era of large conglomerates begin their quest for diversifying their operations by acquiring other businesses. Naturally concerns were raised as it was seemingly becoming impossible to stop conglomerates from having excessive economic power in a free market. Still, under Ronald Reagan’s government, few steps were taken by the U.S. Department of Justice on the matter of enforcing anti-takeover regulations on large corporations. Unable to protect themselves against inimical takeover propositions, several small businesses chose to formulate anti-takeover policies.
Poison pill or people pill strategies are self-protective strategies that enable businesses to obstruct aggressive takeover bids from larger corporations. By implementing a poison pill policy, a small business can to a certain extent be assured that purchasing corporations will first approach the business’ board of directors and not directly contact the stockholders of the company. Poison pill strategies can also be called the ultimate protection right policy for shareholders’ interests.
The Different Types of Poison Pill Strategies
1. The “Flip-Over” Policy
Under this policy, the stockholders of a company obtain one ‘right’ for every share that they hold. This ‘right’ enables them to purchase more shares. The rights come with a preferential advantage and have an expiry date. These rights don’t come with voting power and they are practically of no value during the offering period. The shareholder can’t sell these rights separately as they are essentially extensions of the shares that they own until there’s a takeover bid.
In the event of an unwanted acquisition bid, these rights get separated from the shares. In case this takeover is completed, these shareholder rights can be implemented to acquire shares at almost a 50% discount on the present market price. Hence in the event of an unwanted takeover, shareholders can essentially regain their position in the company at a low cost.
2. Poison Debt
In this tactic, the company being targeted by other corporations can issue debt securities on specific stipulated conditions to deject an aggressive takeover bid. Instances include - agreements that strictly limit the business’ capability to put assets on the market, unprecedented increases in interest rates, accelerating maturity dates of debts, converting debt to equity at propitious rates, and rights to acquire notes at a considerable premium to the existing market value during the takeover. The launch of these tactics essentially deters the interest of the acquiring company as the risk of acquiring poisonous or severely harmful debt comes along with the acquisition.
3. “Put Rights” Strategy
In this approach, the target company offers rights to its shareholders in the form of bonuses or dividends. When a purchasing company acquires a definite percentage proprietorship in the target business, the company’s existing shareholders (not including the buyer) are authorized to sell their mutual stock back to the business for a definite amount of either cash or debt securities or a mixture of both.
Yahoo famously introduced poison pill policies both in 2001 and in 2008 when Microsoft approached them for acquisition. Since then Yahoo has expanded their poison pill strategies by expanding severance packages to its staff in the event of such an aggressive acquisition.
Summary
With the help of self-protective people pill or poison pill strategies, businesses endeavor to shield themselves against aggressive takeovers. There are various categories of poison pill strategies such as Flip Over policy, Poison Debt and Put Rights Strategy. These not only protect businesses, but also the interests of the shareholders.