Advantages and Disadvantages of the Poison Pill

A “Poison Pill” creates a strong defense mechanism for a “target company” allowing the company to properly identify legitimate and beneficial acquisitions and weed out the actions of corporate raiders.  The “Poison Pill” is also useful in slowing down the speed of potential raids.  The spin-off effects are quite positive and could result in higher premiums paid to shareholders, should an acquisition be favorable.

On the downside, the “Poison Pill” has the power to greatly reduce shareholder value.  For example, in 2008, Microsoft offered shareholders of Yahoo! $31 a share representing a 62% premium at the time, but quickly backed out after the effect of the “Poison Pill” defense proved to be too much to handle. This cost Yahoo! CEO and co-founder Jerry Yang his position as head of the company.  Yahoo! shares have not traded anywhere close to $30 since this proposal.

Unfortunately, a “Poison Pill” could also create inefficiencies in the system and harm not only the bidder but also the shareholder.  A purchaser who wishes to buy and an individual investor who wishes to sell are simply out of luck with both actions locked by the “Poison Pill.”  If anything, this undermines shareholders rights, rather than supporting them.

On the other hand, one might argue the following.  Consider that corporate raiders are skilled in the art of discovering intrinsic value hidden deep within the target company that is not apparent on its balance sheet nor in its current stock price.  A hostile takeover can present an opportunity to install fresh, qualified and dedicated management who are willing and able to guide the company in a brand new direction.

Conclusion

At the end, it is hard to say whether a poison pill is a good thing or a bad thing. It really needs to be analyzed on a case by case basis. All we know is that is is a useful tool to fend off a hostile takeover.

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