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The Takeover Wars of the 1980s: How Poison Pills Saved Companies from Takeovers
In the 1980s, American companies experienced an unprecedented takeover war. Facing ruthless competition and acquisition threats from powerful enemies, some companies urgently need to find defensive measures to maintain their independence. The Poison Pill was born under this background and became a weapon for companies to fight against hostile takeovers. This type of shareholder rights plan allows a company to significantly dilute a potential acquirer's shareholding if it acquires a large number of shares, thus increasing the cost of the acquisition and thus protecting the independence of the company.
The origin of poison pills
The concept of poison pills was first proposed by legal expert Martin Lipton in 1982. At the time, the United States was facing a wave of hostile takeovers, particularly by corporate raiders like T. Boone Pickens and Carl Icahn. The name poison pill comes from the poison pills that spies in history carried for self-protection so that they would not be tortured if discovered by the enemy. Such a strategy would undoubtedly be a tough battle for the business, but many shareholders may be uncomfortable with such defensive measures.
Poison pills give management time to plan and negotiate in the face of takeover threats and create opportunities among shareholders to negotiate a higher sale price.
How poison pills work
Poison pill plans usually work like this: When one shareholder gets 20% of the company's shares, other shareholders have the right to buy more shares at a favorable price. Since the purchasing behavior of shareholders in this case will dilute the acquirer's shares, forcing the acquirer to acquire the company at a higher price. Usually, the administration of poison pills is also within the discretion of the company's board of directors, which allows the company to make the right response based on the actual situation.
Legal status and limitations of poison pills
The poison pill plan was recognized as an effective defense strategy in 1985 by the Delaware Supreme Court, but its legal status has been controversial in other countries. For example, Canada's poison pill programs are often combined with the concept of "permissible acquisitions," while the United Kingdom prohibits this defensive approach. In addition, the legality of such programs internationally is still evolving.
While poison pills can be effective in blocking hostile takeovers, their existence also raises concerns among investors because they may prolong management's time in the job.
The resurgence of poison pills in recent years
In 2020, due to the impact of the global COVID-19 epidemic, the stock prices of many companies plummeted. At this time, many companies are once again choosing to use poison pill plans to guard against potential acquisitions. In March 2020, 10 companies in the United States announced the use of new poison pills, setting a new record. In addition, in 2022, the Twitter board of directors also unanimously approved the poison pill plan after Elon Musk proposed an acquisition. Although the final acquisition still took place, it can be seen that the effectiveness of poison pills in preventing hostile takeovers still exists.
The future of poison pills
As the corporate environment changes, the use of poison pills continues to evolve. Many investors are skeptical of its effectiveness, arguing that the poison pill could impact a company's future productivity and growth potential. Faced with such adjustments and changes, how companies can strike a balance between protecting their own interests and meeting shareholder expectations has become a challenge that remains to be solved.
In an ongoing acquisition war, will companies choose to continue to use poison pills as a defensive method, or will they seek other more flexible strategies and measures?
