Poison Pill Strategy - A brief Introduction

General
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Of late, If there’s one buzzing word in the financial world that everyone is talking about, That would most likely be the term “ Poison Pill”

Background

Those who are active on twitter would probably know what I’m talking about. Elon Musk, The richest man on the planet is not only trying to take over twitter with his posts, comments and the controversies that come around with it, but he has taken this trolling to a next level when he conducted a poll whether there should be any changes in twitter going forward - When the result of this poll was Yes. He then pulled a move that only he could have pulled off - He silently bought 9% stake in Twitter and became the largest single shareholder - What followed next was the usual board room stuff that happens - Twitter trying to welcome Elon to the board and Elon being clear with his objectives which the board were not clearly in consonance with. Elon then came up with an offer to buy 100% of twitter for 43 Billion Dollars. The Twitter board then came up with the Poison Pill to avoid any hostile takeover from Elon.

What is a Poison Pill Strategy ?

The word finds its roots in the world of espionage, where the spies are to take cyanide capsules in case they are captured by the enemies.

It is basically a defensive strategy of last resort (originated in the 1980’s ) used by the companies when there is a possibility of hostile takeover by competitors or other outsiders.

How does it work ?

In this strategy, Shareholders (except for the one who is trying to acquire) are allowed to buy shares of the company at a deep discount. This right to purchase is given to the shareholders before the takeover is finalized and is often triggered when the acquirer amasses a certain threshold percentage of shares of the target company.

For example : Some companies may choose to implement this strategy when the acquirer takes 30% of the shares. In the case of Twitter, This clause is triggered when an entity or person has acquired more than a 15% stake in the company without the board’s approval.

Effect of this strategy ?

  • It leads to Share value dilution.

  • Discourages Institutional investors to buy such companies.

  • In some cases, it protects the rights of the minority shareholders.

  • It significantly raises the cost of acquisition.

Examples from the past ?

Papa John’s

In July 2018, the board of restaurant chain Papa John’s \voted to adopt the poison pill to prevent ousted founder John Schnatter from gaining control of the company. Schnatter, who owned 30% of the company’s stock, was the largest shareholder of the company.To repeal any possible takeover attempts by Schnatter, the company’s board of directors adopted a Limited Duration Stockholders Rights plan—a poison pill provision. Dubbed the wolf-pack provision, It essentially doubled the share price for anyone who attempted to amass more than a certain percentage of the company’s shares without board approval.

The New York Times reported that the plan would take effect if Schnatter and his affiliates raised their combined stake in the company to 31%, or if anyone purchased 15% of the common stock without the board’s approval.

Since Schnatter was excluded from the dividend distribution, the tactic effectively made a hostile takeover of the company unattractive: the potential acquirer would have to pay twice the value per share of the company’s common stock. It prevented him from trying to take over the company he founded by buying its shares at market price.

Netflix

In 2012, Netflix announced that a shareholder rights plan was adopted by its board just days after investor Carl Icahn acquired a 10% stake. The new plan stipulated that with any new acquisition of 10% or more, any Netflix merger, sales, or transfer of more than 50% of assets, allows for existing shareholders to purchase two shares for the price of one.

Source : Investopedia

Hostile Takeovers in India

Here are some of the cases of Hostile takeovers in India. Latest one being L&T’s acquisition of Mindtree

What’s the Status of Poison Pills in India ?

In India, Currently, the legal framework does not expressly bar the poison pill, but concomitantly, does not facilitate its adoption by the entities.

The below article is a nice read on poison pills.

What are your views on this strategy? And should this be allowed in India ?

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Elon musk wishes to take over this company at a 40 percent premium or so from the current market price. He is offering this deal when the market is fairly normal/stable. The board is trying to do what is best for the shareholders, by using poison pill and negotiating with him.

Anil Agarwal wanted to take over vedanta and delist when the market price was at its 52 or lifetime low at 87.50, people were grappling with the corona pandemic and he along with his investment bankers thought he could get this company with all its cash balance at such low value. The board did nothing, they were eminent individuals, but forgot their fiduciary duties. They kept mum and passed it on to shareholders for voting. Few of the directors i am told have resigned now but it was a sad situation for minority shareholders. No one bothered.

What saved the day was the sebi regulations where shareholders refused to tender the minimum required of 90 percent and to follow price discovery. Even here they tried to put false news that they got 90 percent. Lic was the saviour who offered the shares at 320 and the delisting failed. Cannot and will not forget this episode.

Need to thank proxy advisors who put so much pressure that sebi subsequently made lot of amendments on delisting. Now the board has to recommend or not when there is a delisting and not to keep their frigging mouth shut. These guys forgot they took salaries from the company and not from the promoters pocket

Happy to hear that bpcl disinvestment has been postponed. This guy was one of the suitors.

Look at the stark difference between these two people.

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