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What is a Poison Pill

What is a Poison Pill. A legal contract giving target company shareholders certain rights under specific circumstances. Types of Pills (1). Flip Over Gives target shareholders the right to buy shares in the acquiring company at a discount (usually 1/2 price) AFTER a merger. Types of Pills (2).

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What is a Poison Pill

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  1. What is a Poison Pill • A legal contract giving target company shareholders certain rights under specific circumstances

  2. Types of Pills (1) • Flip Over • Gives target shareholders the right to buy shares in the acquiring company at a discount (usually 1/2 price) AFTER a merger

  3. Types of Pills (2) • Flip In • Gives target shareholders the right to buy shares in their own company at a discount (usually 1/2 price) when an acquiror passes a specified ownership level

  4. Types of Pills (3) • Dead Hand • Permits only directors who adopted a pill (or their approved successors) to rescind it

  5. Evolution of Poison Pills • Combat coercive two-tiered offers • Household International (1983) • Combat Saturday Night Specials • Also, Williams Act (1968) • Goldsmith/Crown Zellerbach • Evades flip over pill by not completing the merger (1983) • Proxy Fights • Replace board • Rescind pill • Led to Dead Hand (1988)

  6. Key Points on Pill Assignment (1) • Assume all shareholders start with enough cash to exercise all the rights. Although not necessary, it gives the answers more intuitive appeal. • Assume Company may issue any additional shares that may be required by the exercise of the rights (even if the number exceeds shares authorized).

  7. Key Points on Pill Assignment (2) • Remember: a poison pill neither creates nor destroys value. • Therefore, total wealth ( stock plus cash) of the acquiring + non-acquiring persons will be the same before and after the pill is triggered (although there will be a redistribution of wealth). • While one group may gain wealth, they do so at the other group's expense.

  8. Key Points on Pill Assignment (3) • Since value is neither created nor destroyed, the initial value of the company does not change except for the cash it receives from the rights being exercised under the conditions of the pill. • However, since additional shares are issued upon exercise of the rights, the price/share of the company may also change.

  9. Key Calculations (1)NUMSHARES • Calculate Shares (NUMSHARES) To Be Purchased by Exercising One Right • NUMSHARES = (PCHPRICE * 1) / (0.5 * CURRPRICE) • Example: if PCHPRICE = $100 and CURRPRICE = $25 then NUMSHARES = 8 • Therefore, 8 shares can be purchased by exercising one right at a "purchase price" of $100, i.e., $12.50/share

  10. Key Calculations (2)Cash Expenditures • Number of shares held by acquiring and non-acquiring persons • Cash outlay (if any) by non-acquiring and by acquiring persons

  11. Key Calculations (3)P1, Share Price After • New price per share, P1 P1 = V1 / S1 • V1 is the new (post-exercise) value of the firm, V1 V1 = V0 + CashCash is that given to the company in exchange for new shares attained in exercising the rights, and V0 is the original value of the firm • S1 on next slide

  12. Key Calculations (4)P1, Share Price After • S1 is the total number of shares after exercise of the rights S1 = S0 + SnWhere So is the original number of shares outstanding, and Sn is the number of shares newly issued upon exercise of the rights • New price per share, P1 P1 = V1 / S1

  13. Legality of Pills (1)General Comments • Pills have been held valid except under certain circumstances. • Directors usually need to meet a (BJR) fiduciary duty standard for a pill to be upheld. • Sometimes a higher, "Unocal" standard must be met ("reasonable response in light of threat posed")

  14. Legality of Pills (2)Specific Cases • Interco (Rales): Invalid (no threat) • Irving Bk (B NY): Invalid (D Hand) • Time (Paramount): Valid (1989) • Pillsbury (Grand Met): Invalid • Healthdyne (Invacare): • Valid (GA, Dead Hand, 1995) • Conrail (CSX, Burlington): • Valid (PA, Dead Hand, 1996) • Delaware has generally held Dead Hand pills to be invalid

  15. Corporate Governance Implications • Shareholders do not voteon pills (except for precatory resolutions) • Diversified investors may prefer that takeovers take place, even at lower prices • Key Questions: • Are p. pills good for a company? • Are p. pills good for shareholders? • How to evaluate such questions? • Stock price event studies? • Takeover premiums?

  16. Bristol Myers Squibb • BMY stockholders voted May 7, 2002 in favor of a proposal that may make it an easier target for a takeover. It requires that the board seek shareholder approval before adopting any poison pill. • The proposal also asked the board to rescind any poison pill in effect that's not approved by stockholders.

  17. Bristol Myers Squibb • Holders voted 873 mm shares for and 418 mm against, the 10-Q filing said. The company's board isn't bound by the proposal. • Shareholders also voted 899 mm shares in favor of a proposal to reinstate annual election of directors, with 397 million shares voted against the proposal.

  18. Institutions and Pills Portfolio I Portfolio II w/o Pill With Pill • Co. A 8% 8% • Co. B 8% 8% • Co. C 8% 8% • Co. D 8% 8% • Co. E 35% A 8% • Co. F 35% A 8% • Co. G 35% A 8% • Co. H 35% A 50% A • Co. I 35% A 50% A • Co. J 35% A 50% A Avg: 24% 21%

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