Hostile Takeovers & The Corporate Poison Pill
Managing a corporation comes with a wide variety of challenges that management must carefully navigate to be successful. One of these challenges is what’s known as a hostile takeover. In short, a hostile takeover occurs when another company or investor begins purchasing a large number of shares on the open market. The goal is to acquire enough shares to gain control of the company, often without the consent of its board of directors. Sometimes, this effort is initiated by a single investor—such as when Elon Musk began buying shares of X (formerly Twitter). In other cases, it can be a coordinated effort among multiple investors working toward a shared objective.
One of the most common defenses against a hostile takeover is what’s referred to as a "poison pill." Rest assured—no one is ingesting anything harmful! A poison pill, formally known as a shareholder rights plan, is a strategy designed to make a takeover prohibitively expensive or unattractive to the potential acquirer. Employing the poison pill strategy helps management retain control and provides time to explore other options that align with the company’s goals.
Poison pills come in various forms, but the most common involves allowing existing shareholders (other than the acquirer) to purchase additional shares at a discount if any single investor exceeds a certain ownership threshold—often 10% to 15%. This dilutes the hostile party’s stake, making it significantly more expensive for them to acquire a controlling interest.
You might be wondering why a company would go to such lengths to defend against a takeover. After all, increased demand for shares often drives up the stock price, which might appear beneficial to shareholders. However, a hostile takeover can potentially have significant drawbacks. For example, an acquiring company might prioritize short-term profits over the long-term health of the business, leading to layoffs, reduced investment in innovation, or even asset liquidation.
The Poison Pill in Action
Here are several examples of the corporate poison pill being used by well-known companies:
X (formerly Twitter: TWTR)
In 2022, X adopted a poison pill after Elon Musk disclosed a 9.2% stake in the company and made an unsolicited bid to buy the company outright. While this did delay the takeover and may have led to more favorable conditions, Musk was ultimately successful with the takeover.
Netflix: NFLX
Netflix implemented a poison pill in 2012 after activist investor Carl Icahn revealed a nearly 10% stake in the company. This gave Netflix crucial time to explore strategic options and safeguard its independence.
Papa John’s: PZZA
In 2018, Papa John’s own founder, John Schnatter, attempted to regain control of the company. Papa John’s board was quick to implement a poison pill that ultimately proved successful in preventing Schnatter from regaining control.
Google: GOOGL/GOOG
Back in 2005 Google opted to implement a poison pill very early on in a proactive measure to fend off any single entity or competitor from gaining too much control of the company.
Men’s Warehouse
In an interesting turn of events, Men’s Warehouse adopted a poison pill to block a hostile takeover attempt by competitor Jos. A. Bank. Not only was the poison pill successful in stopping the takeover, Men’s Warehouse ended up acquiring Jos. A. Bank instead.
By implementing a poison pill, companies can maintain leverage in the face of a hostile takeover. This tactic doesn’t necessarily eliminate the possibility of a sale but instead gives management breathing room to negotiate or seek alternative buyers who may offer better terms.
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