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Poison Pills
Date Added: June 12th, 2001

By Chris Stallman  |  E-mail

   When I was young, I didn't always get along with my sister and there were times when I'd have something that she wanted but I didn't want to share. In order to win the fight and get things MY way, I'd try to do something to it so that she would no longer want it. I would never have thought that this same thing is often practiced in the business world...

   When a company wants to buy out another public company they have to make an offer and the shareholders usually give their approval. Every once in a while, a company doesn't want to be bought out and that's when things turn hostile (hence the name "hostile takeover").

   Usually when a company doesn't want to be taken over, it's because they feel that the offer is inadequate and they think that shareholders would be better served if the company wasn't bought out. In order to prevent the hostile takeover from happening, the company can adopt a "poison pill" plan.

   The poison pill is meant to make the company so expensive and unattractive that the potential buyer would no longer be interested. The company can do this in a number of ways. One common way is to issue lots of shares of stock so that it's harder for buyer to acquire a majority of the shares. Some companies also begin issuing preferred stock to the shareholders to give them more power in the event of a takeover. Another way that companies discourage takeovers is by taking on a heap of new debt.

   Poison pills are usually only used to serve the shareholders' best interest by protecting them from being bought out at a low price. If the company feels that the shareholders are best served by being acquired by the new company, then the company usually agrees to the offer. So if you hear about "poison pills" in the news, you'll know what they're talking about.

 

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