Poison Pills some times not good. poison pills can come into play when and investor takes ove somwhere around 20% of the putstanding shares of a company...which the Mou is maybe going to do.
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.