What is a Poison Pill in Activism Finance? A Genius Way to Stop a Hostile Takeover Attempt
What is a poison pill in the subject of activism finance? A poison pill is something that I had recently learned about in my senior capstone finance class several years ago, and that I recently came across again in my Carl Icahn and Bill Ackman video. A poison pill, is the contrarian state of Green Mail and of a hostile takeover, and it is actually a very ingenious way to stop a takeover from happening. Basically, what happens is that in the case of a hostile takeover, I am trying to get 51% of the voting shares of a company in order to take voting control and assume ownership and control of the corporation. What happens in a poison pill situation is that the board members and other shareholders issue new shares, usually at a significant discount to your current investors, in order to dilute the ownership of the shares that the corporate raider just purchased. Typically, if the poison pill is done correctly, you can dilute the ownership stake and the share value enough so that they cannot afford to tender offer the securities or buy up enough shares to take over the company. Other common terms used in activism include:
And a host of other similar and related finance terms. Read on or subscribe to our blog for additional details and information.
How Corporate Buyers Fight Back Against the Poison Pill
So, to keep this fairly short and sweet, since I have other blog posts about Finance to write tonight, corporate raiders will typically fight back against the poison pill by continuing to buy up more and more shares. This ultimately leads to something of a short squeeze effect and makes it so that they cause their own demise in a sense, since the company effectively makes a situation where shareholders can keep buying shares at a discount (from the company that is diluting the shares) and sell them at a premium (for the activist that is tender offering in an attempt to takeover the company.) This is a very interesting subject in the field of finance, and to be honest, I cannot go much deeper than this since this is basically where my knowledge stops on the subject.
Final Thoughts on What is a Poison Pill in Finance? And What do You Think of Corporate Activism?
So, in short, it is a corporations way of diluting their ownership shares so that a corporate raider cannot assume control of the company. What typically happens in the case of a corporate activist, is say that a billionaire wants to buy sears, but the CEO/Owner does not want to sell. If I’m the billionaire trying to buy Sears and then rebuild it, what I will do is buy up majority holdings in the company, then use this to get myself a board seat, and from here convince the other board members via a tender offer of their shares to sell me their stakes in the company. They go home rich and I get a shot at re-building Sears as a better brand. If you understand or you don’t understand, leave a comment down below and remember to subscribe!
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