Poison Put
What Is a Poison Put?
A poison put is a takeover defense strategy wherein the target company issues a bond that investors can recover before its maturity date. A poison put is a type of poison pill provision intended to increase the cost a company will incur to gain a target company.
How a Poison Put Works
Executives can utilize a number of various strategies while defending their company from a hostile takeover bid. Poison pills are one such strategy and are intended to make the prospect of acquiring a company through a takeover bid costly and less inclined to happen. This type of takeover defense is legal, however company executives actually have a duty to act in the best interest of shareholders.
Poison puts are a type of poison pill defense wherein bondholders are given the option of obtaining repayment in the event that a hostile takeover happens before the bond's maturity date. The right of early repayment is written in the bond's covenant, with the takeover representing the trigger event.
Benefits of a Poison Put
During a hostile takeover, an acquiring substance — generally a rival company or a activist investor — endeavors to assume command over a publicly traded company without the endorsement of the company's board of directors. The board has certain strategies at their disposal they can enact to foil the future acquirer.
The poison put can be an effective strategy for the target company since it means the acquirer should spend more money to assume command over the company. In this manner, companies looking to complete a hostile takeover must balance the cost of acquiring a controlling interest in the target company with other acquisition costs.
On the off chance that a company doesn't have substantial assets or has huge debt, a poison put could cause financial difficulties.
A poison put is not quite the same as other poison pill defenses in that it doesn't influence the number of shares in the market, the price of shares, or the voting rights stood to shareholders. It instead straightforwardly impacts the amount of cash that an acquired company has close by shifting bond obligations from the future to the date at which the hostile takeover happens. The acquiring company must be certain that it has adequate cash to cover the immediate repayment of bonds.
A poison put strategy may not work for a target company that as of now has huge amounts of debt, as this strategy increases the company's debt load and could lead to insolvency.
Alternatives to a Poison Put
Poison put isn't the main tactic companies use to upset or prevent hostile takeovers. Several different systems have proven fruitful at thwarting these undesirable acquisitions.
Crown Jewel
A company executes the crown gem defense when it sells off its most valuable assets, otherwise called the crown jewels, to cause it to show up less attractive to the acquiring company. The crown jewels of a company are the income driving assets.
To enact the crown gem defense, the target company sells its assets to a white knight — an outsider that gains a company under additional favorable terms than the hostile black knight. Under this technique, the white knight commonly consents to sell the assets back to the target company after the hostile takeover is terminated.
Stock Acceleration
Similar as the poison put option, stock acceleration, otherwise called triggered-option vesting, is a technique used to avoid hostile bidders by making the company not so much attractive but rather more costly to procure. Under this strategy, employees' unvested stock options vest fully and, thusly, must be paid by the acquiring company when a specific event happens.
The acquisition is the event that encourages the accelerated vesting. In this manner, in the event that the sale doesn't happen, the vesting plans remain with no guarantees. In the event that the acquisition completes, the company might experience difficulty retaining skilled employees whose continued employment might have been to a great extent founded on their percentage of vesting.
Pac-Man Defense
Target companies utilize the Pac-Man defense to reverse the takeover; under this strategy, the target company tries to assume control over the hostile bidder. The acquiree turns into the hostile bidder by obtaining a controlling number of the acquirer's shares. This undermines the acquisition as well as the acquirer's company.
Like its arcade game namesake, the Pac-Man strategy gives the target company, using power, the ability to chase and consume the individuals who initially targeted them for consumption. To be effective, the target company must have sufficient power, or resources, to assume control over the hostile company.
Illustration of a Poison Put
A company's board of directors accepts that a bigger contender might endeavor to procure it later on. As a defense, the company incurs new debt by issuing corporate bonds. As part of the recently issued bond, the board includes a poison put covenant, which is a provision that specifies bondholders can receive early repayment of the debt should a triggering event happen, like a hostile takeover.
The total value of the bonds is $50 million. For the contender to successfully gain the company, it must not exclusively have the option to manage the cost of the purchase of a controlling interest of shares yet additionally manage the cost of a likely immediate repayment of $50 million to bondholders. In the event that the acquirer doesn't have the money to pay this extra acquisition cost, they might have to pull out their hostile takeover endeavor, and that means the poison put strategy was effective for the target company.
Features
- A poison put is a type of takeover defense strategy intended to make it more costly for an acquiring company to gain control of a target company during a hostile takeover bid.
- The poison put strategy requires executives of the target company to issue a bond with a poison put covenant.
- The poison put covenant specifies that bondholders can reclaim their bond before the maturity date and receive full payment on the off chance that there is a takeover of the company.
- As opposed to poison pills, poison puts don't influence shares or voting rights.
- The poison put is an additional expense the acquiring company must pay assuming that it wishes to get the target company.
FAQ
What Is a White Knight Strategy?
The white knight strategy involves a friendly outsider acquiring the target company under additional favorable conditions than those of the hostile bidder or black knight. Frequently, management and the board of directors remain intact and investors receive something else for their money.
Are Poison Pills Good for Shareholders?
Poison pills introduce more shares into the market, diluting existing shares. Existing shareholders' ownership is diminished, requiring the purchase of extra shares to return to their previous level of ownership.
What Is a Flip-In Poison Pill?
A flip-in poison pill is a strategy that permits everything except the acquiring company's shareholders to purchase extra shares in the target company at a discount. The new influx of shares weakens the value of shares purchased by the acquirer, accordingly making the acquisition not so much attractive but rather more costly.
What Is a Flip-Over Plan?
A flip-over plan is a strategy wherein target company shareholders are able to purchase shares of the acquirer at a discount in the event that the acquisition is satisfied. These extra shares in the market weaken the existing shareholders' value.
