In news– Twitter is trying to fend off a hostile takeover bid by one of its shareholders, Tesla’s Elon Musk, by invoking an old strategy called ‘Poison pill’.
What is poison pill strategy?
- The method, known as a “poison pill” in the finance world, essentially allows existing shareholders to purchase freshly issued shares in a company at a discount to the trading price, effectively making any possible buyout plan extremely costly and prohibitive for the party planning a hostile takeover.
- In this case, the move will prevent anyone from having more than a 15 per cent stake in Twitter by allowing existing shareholders to buy additional shares at a discount.
- The poison pill strategy was developed by New York-based law firm Wachtell, Lipton, Rosen, and Katz in the 1980s.
- The term stems from the practice of spies carrying a poison pill that they could ingest if captured by the enemy, preventing them from extracting knowledge through torture or other means.
- While the poison pill strategy is bad for all shareholders in the near term, it also makes it difficult for the hostile party to buy all of the new shares.
Types of poison pills-
The flip-in and flip-over poison pill tactics are the two sorts of strategies. The flip-in option is the more popular of the two options.
Flip-in poison pill:
- Allowing all shareholders, excluding the acquirer, to purchase additional shares at a discount is known as a flip-in poison pill strategy.
- While purchasing additional shares offers stockholders with immediate profits, the strategy dilutes the value of the acquiring company’s limited number of shares already owned.
Flip-over poison pill:
- The flip-over strategy allows shareholders of the target company to purchase shares of the acquiring company at a significantly reduced price.
- Because it threatens to dilute and devalue the stock of the corporation attempting to take over the target, the tactic functions as a hostile takeover defence.