Poison Pill-Shareholder Rights Plan: Advantages/Di
"Advantages The use of poison pills can be advantageous for both shareholders and management.
- Extremely effective. Historically, poison pills have a high rate of success. They are actually one of the most useful tactics for fighting a takeover. This can be a good thing for investors, especially if they are concerned that a takeover will not be beneficial to the organization.
- Informal structure. The poison pill is a flexible system that can be tailored to a company’s needs. They can structure which assets the pricing terms apply to, such as convertible bonds, notes, stocks, options, bonds, and CDs.
- Protects against unscrupulous buyers. Every company that initiates a hostile takeover does so for their own benefit. They may intend to dismantle their target and sell it piece by piece, or they may lack the industrial insight and experience to run the company effectively. As a result, the target company may create a poison pill to protect themselves from a buyer that would ultimately hurt management and existing shareholders.
- Gives management time to seek other offers. Rather than prevent a takeover, poison pills can provide management the opportunity to find a better offer or create a bidding war.
- Obtain higher premiums. Studies suggest that firms with poison pills receive a 10% to 20% higher premium from acquiring firms over companies that do not have a poison pill in place.
----. Disadvantages of the Poison Pill Although poison pills provide a number of benefits to corporations and investors, they can also be risky. The practice of using poison pills to fight takeover attempts has come under scrutiny both by critics and the courts in recent years for some of the following reasons:
- Dilutes the value of stock. When companies issue a number of new shares at a discount, they are saturating the supply of stock. This ends up reducing the value of existing shares and investors are forced to purchase new shares in order to maintain their prior ownership percentage.
- Investors forgo profit from a takeover. During a takeover, investors are often paid a premium for their stock. Therefore, the use of a poison pill may deprive investors of potentially hefty profits. Unfortunately, investors who would prefer that the takeover go through successfully don’t have much power to fight a poison pill.
- Poison pills tend to protect poor managers. Companies that are the targets of takeovers are often subject to poor performance. The acquirer typically realizes that the target company has major room for improvement if managed properly. As a result, poison pills are instituted by management to protect their own jobs and, ultimately, deprive investors of a better management team.
- Discourages institutional investors. Institutional investors have been increasingly apprehensive about poison pills since they can make it easy for management to make selfish decisions at the expense of shareholders. For example, a CEO who makes $10 million per year will have a huge incentive to turn down any takeover offer in order to preserve his or her job. Since takeover premiums sometimes offer the highest return for shareholders, they can lead to decreased institutional interest in the company, which can in turn hurt stock prices since institutions are the largest buyers. Ultimately, institutions are less likely to invest in a company that purposely looks to scare off potential suitors.
---. Poison pills are a popular and effective way to fight hostile takeovers. But while they can benefit shareholders, they can also be detrimental depending primarily upon the motivations of both companies involved. The primary drawback, perhaps, is that they give untoward power to management even when the majority of shareholders may be opposed to their use. Be cautious of corporations that limit buy-out opportunities with “shareholder rights plans,” which are often intended to limit shareholder rights in the end.” Read more: https://www.moneycrashers.com/poison-pills-fight-hostile-takeovers/#ixzz2JxpljFAF