Poison pill
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Poison pill is a term referring to any strategy, generally in business or politics, which attempts to avoid a negative outcome by increasing the costs of that outcome to those who seek it. This is a reference to literal poison pills (actually often vials of cyanide salts) carried by various spies throughout history, and by Allied leaders in WWII.
Business
In business, it is often used to avoid a hostile takeover bid. These are attempts by a potential acquirer to obtain just over 50% of the shares of the target company, and thereby gain control of the board and, through it, the company's management. There are several types of "poison pills" that can be planned by a company that thinks it may be the target of a takeover by a potential acquirer:
- The target issues a large number of new shares, often preferred shares, to existing shareholders. These new shares usually have severe redemption provisions, such as allowing them to be converted into a large number of common shares if a takeover occurs. This immediately dilutes the percentage of the target owned by the acquirer, and makes it more expensive to acquire 50% of the target's stock.
- The target takes on large debts in an effort to make the debt load too high to be attractive -- the acquirer would eventually have to pay the debts.
- The company buys a number of smaller companies using a stock swap, diluting the value of the target's stock.
- The target phrases all its employee's stock option grants to ensure they immediately become vested if the company is taken over. Many employees can then exercise their options and then dump the stocks. With the release of the "golden handcuffs", many discontent employees may quit immediately after they've cashed in their stock options. This poison pill is designed to create an exodus of talented employees. In many high-tech businesses, attrition of talented human resources often means an empty shell is left behind for the new owner.
- Peoplesoft guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their Peoplesoft software licenses. The hypothetical cost to Oracle was valued at as much as US$1.5 billion. The move was opposed by some Peoplesoft shareholders who believed the refund guarantee flagrantly opposed their interests as shareholders. Peoplesoft allowed the guarantee to expire in April 2004.
It was reported in 2001 (http://www.cfo.com/article.cfm/3001307/2/c_3046510?f=insidecfo) that since 1997, for every company with a poison pill that successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers.
The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since, despite the above statistic, poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.
Five main types of poison pills:
- Preferred Stock Plans
- Flip-over Rights Plans
- Ownership Flip-in Plans
- Back-end Rights Plans
- Voting Plans
Politics
A poison pill may also be used in politics, such as attaching an amendment so distasteful to a bill that even the bill's supporters are forced to vote against it. This manipulative tactic may be intended to simply kill the bill, or to create a no-win situation for the bill's supporters, so that the bill's opponents can accuse them of voting for something bad no matter what.
In the U.S., it may also refer to a stipulation often attached to constitutional amendments, which kills the amendment if it has not been ratified after seven years.