Flip-in Poison Pill

What Is a Flip-In Poison Pill?

A flip-in poison pill is a strategy utilized by a target company to forestall or deter a hostile takeover endeavor. This strategy permits existing shareholders, yet not acquiring shareholders, to purchase extra stock in the company targeted for acquisition at a discount.

Flooding the market with new shares dilutes the value of the shares currently purchased by the acquiring company, reducing its percentage of ownership and making it harder and more costly for the buyer to gain control. It additionally enables investors who purchase the new shares to profit instantaneously from the difference between the discounted purchase price and the market price.

How a Flip-in Poison Pill Works

Poison pills comprise various strategies that companies can use to keep from being dominated. The strategies make the company less appealing to an expected acquirer and may perhaps damage the company — thus, the term "poison pill."

There are a couple of types of poison pills, for example, preferred stock plans, flip-over poison pills, back-end plans, and voting plans. A flip-in poison pill provision is many times found in a company's charter or local laws, a corporate document outlining how the organization is to be run, as a public display of their expected use as a takeover defense. This tells any company thinking about a hostile takeover that they will face hardships.

The rights to purchase happen just before a possible takeover, and when the acquirer outperforms a certain threshold point of obtaining outstanding shares — commonly between 20 to half. On the off chance that the potential acquirer sets off a poison pill by accumulating more than the threshold level of shares, it risks discriminatory dilution in the target company.

The threshold lays out a ceiling on the amount of stock any shareholder can collect before being required, for reasonable purposes, to send off a proxy contest.

Drawbacks of a Flip-in Poison Pill

Companies can't choose at an impulse regardless of whether to carry out a flip-in poison pill. It must be employed in the event that it is in the company's ordinances prior to the takeover. At the point when it works out, it very well may be beneficial in preventing a takeover however can accompany numerous disadvantages.

Managers that are bad at their job might execute a poison pill to keep their positions. Poison pills can likewise weaken shareholder power. The stock value may likewise be diluted. As a poison pill makes a company less appealing, this could dismiss likely investors.

One more important thing to bear in mind is that acquirers some of the time try to fight a flip-in poison pill in court. Some of the time they are effective and able to break up any program providing the deep discount.

Flip-in Poison Pill versus Flip-Over Poison Pill

One more defense mechanism utilized against takeover up-and-comers is a flip-over poison pill. This strategy gives existing shareholders in the company being assumed control over the right to purchase the acquiring company's stock at a discounted price.

Other defensive strategies to forestall a hostile takeover include white knight, greenmail, a employee stock ownership plan (ESOP), and a staggered board.

This can occur assuming the hostile takeover is first fruitful. This outcomes in the shareholders of the target firm diluting the shares of the shareholders in the acquiring firm. These rights possibly come full circle when a takeover bid emerges and must be employed in the event that it is included in the local laws of the acquiring company.

The shares for existing shareholders accompany rights that permit them to exercise the purchase of the acquiring company at market price, which is normally double that of the exercise price — the price they receive for new shares.

Illustration of a Flip-in Poison Pill

Company ABC is a large company in the streaming service space that has seen huge growth in the last five years. Media Mogul DEF is a large media conglomerate that as of late purchased a 10% stake in the company. This action set off the alerts of Company ABC as it is notable in the financial world that Media Mogul DEF purchases many companies.

To forestall a takeover, Company ABC redrafts its ordinances, stating that assuming that any company purchases over 10% of the company without endorsement from the board, Company ABC will release more shares into the market. This would then weaken the current percentage ownership of Media Mogul DEF.

On the off chance that Media Mogul DEF was as yet intent on purchasing Company ABC, it would need to spend more money to purchase more shares to gain a controlling stake.

Features

• The rights to purchase happen just before a possible takeover and when the acquirer outperforms a certain threshold point of obtaining outstanding shares.
• A flip-over poison pill occurs after a hostile takeover is effective and permits shareholders of the target company to purchase shares in the acquiring company at a discount, diluting the shares of the acquiring company's existing shareholders.
• Flip-in poison pill is a strategy enabling shareholders, other than the acquirer, to buy extra stock in a company targeted for takeover at a discount.
• The provision for a flip-in poison pill takeover defense can be found in the company's standing rule or charter.
• Flooding the market with new shares weakens the value of the shares previously purchased by the acquiring company, deterring the buyer from crossing the ownership threshold.

FAQ

Are Poison Pills Legal?

Indeed, poison pills are legal. They are incorporated into a company's local laws and have been maintained in court. There are instances where a court can upset a poison pill strategy; be that as it may, they are as yet a legal form of preventing a hostile takeover.

What Is a White Knight?

A white knight is a defense strategy against a hostile takeover by which a target company considers a friendly company or individual to obtain the company to keep it from being taken over by an unfriendly or hostile company. The white knight comes in and "salvages" the target firm.

Is a Poison Pill a Good or Bad Strategy for a Company?

A poison pill can be both a positive or negative strategy for a company. As a rule, a poison pill is an exceptionally effective defensive strategy in preventing a hostile takeover as it makes the target firm less alluring. A poison pill can make a company's shares unfavorable to an acquiring firm and raise the cost of purchasing the firm. This can be beneficial in keeping a company away, yet it can likewise hurt the company in that it might discourage different investors.

Are Poison Pills Good for Shareholders?

Indeed, a poison pill can be great for shareholders in that it permits existing shareholders the right to purchase extra shares at a discount. This ends up being beneficial provided that the company's share price remains at or over the discount price the shares were received at.