Poison pills allow existing shareholders the right to purchase additional shares at a discount, effectively diluting the ownership interest of a new, hostile party. There are two main types of poison pills: flip-in pills counter hostile offers by buying shares at a discount, diluting the acquirer's control, while flip-over pills allow shareholders to buy shares in the acquirer's company after a merger at a discount. Poison pills can benefit target shareholders by forcing higher acquisition offers but may also negatively impact shareholder value by diluting the stock. Companies like Netflix and Gain Capital have adopted poison pills to fend off hostile takeovers.

1. Evaluating M&A Deals-
How Poison Pills Work
Submitted to: Kannadas sir
Submitted by: Shraddha Tiwari-19049
PGDM

2. Poison Pill Strategy
• A poison pill is a defense tactic utilized by a target company to
prevent or discourage hostile takeover attempts. Poison pills allow
existing shareholders the right to purchase additional shares at a
discount, effectively diluting the ownership interest of a new, hostile
party.
• Actual poison pill was used in Brown Forman vs. Lenox Takeover in
1983.

3. Reasons Poison Pills Were Adopted
Poison Pill Adoption
Stake change Routine Unsolicited offer Activist Investor NOL Safeguard Friendly Merger

4. Types of Poison Pills
• Flip-in Pill: Here the target company buys a large number of shares at a
discounted rate to counter the offer, which eventually leads to the dilution of
control of the acquirer.
• Flip-Over Pill: It generally happens when the shareholders choose to buy
shares in the acquirers’ company after the merger. Let's say the shareholders
of the target company exercise the option of buying two-for-one shares in
the merged company at a discount.

5. Advantages and Disadvantages of Poison Pill
• It is good for the stockholders of the target firm if they allow the target
company to force the acquiring firm to make higher offers for the
acquisition. It is a strong defence mechanism for a target company and could
lead to shareholders earning higher premiums if an acquisition is favorable.
• It has the power to impact the shareholders value adversely. The flip leads to
more purchases at a lower share price and a large number of shares impact
its valuation.

6. Companies that adopted Poison Pill
• Netflix adopted poison pill to fend off Carl Icahn by acquiring 10% stake in
the company.
• Gain capital adopted poison pill defence against FXCM hostile takeover.
• Lipton invented the poison pill defence during a takeover battle in Texas
back in 1982.

7. Conclusion
• It all depends on the long term goals of both the companies. Understanding
how a company responds to hostile takeovers with the poison pill or other
defence can reveal greater truths about the company that how does it tackles
critical issues pertaining to the management and itself.

8. Thank You