What is a Flip-Over Poison Pill?

Flip-Over Poison Pill is a defensive strategy that enables shareholders to purchase shares at a highly discounted price in an acquiring company. If the technique is adopted and the acquisition turns successful, the target firms’ shareholders will dilute the equity of the acquiring firm. It gets triggered when a hostile bid is successful, and strategy is commonly used to combat unwanted takeover attempts.

Shareholders have rights attached to their shares, whereby all shareholders accepting the acquiring firm can pay to exercise their rights. They receive a specific value of the acquiring company’s shares at market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more on the transaction date. Typically it’s double the exercise price, giving the same two-for-one deal in a flip-in but with the acquiring company’s stock instead.

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Strengths of Flip-Over Poison Pill

As flip-over is a poison pillPoison PillPoison pill is a psychologically based defensive strategy that protects minority shareholders from an unprecedented takeover or hostile management change by increasing the cost of acquisition to a very high level and creating disincentives if a takeover or management changes happen in order to alter the decision maker’s mind.read more strategy, below are some of the benefits which are may also be common to other similar practices:

  • They are effective deterrents against hostile takeoversHostile TakeoversA hostile takeover is a process where a company acquires another company against the will of its management.read moreThere is room for bargaining leverage, and boards can choose not to enact such a strategy if the acquiring company is offering a high enough bid or meeting the conditions of the target firm.Extending the above point, target firms can get around 10-20% more from acquiring firms if a flip-over or similar strategy exists.Boards also buy some time to find a “white knight” or strategies that benefit the target company.

Weakness of Flip-Over Poison Pill

Similar to the strengths, certain drawbacks are also applicable:

  • Shareholders may benefit from the takeover if the acquiring firm pays more for their stock. The shareholders may consider the option, as the stocks were purchased at a deep discount.Certain managers may use such techniques to prevent their positions in the larger interest.The firm’s values can be questioned since the stocks may get dilutedStocks May Get DilutedStock dilution is defined as a decrease in the percentage of the ownership held by the existing shareholders because of the new shares issued. Such a dilution can happen either by offering shares in exchange for funds or converting dilutive securities like stock options and convertible debt.read more. Further, companies who desire to make some investments would start questioning the techniques creating drifts and possibly losing out on massive investment opportunities.

Execution of Flip-Over Poison Pill

As per this strategy, each right represents the conditional right to acquire shares of common stock of the hostile bidder at a discounted price. Once the event is triggered, the rights would detach from the shares, becoming freely transferable. However, at that point, the rights would not be significant. If the acquirer were to attempt a merger/similar transaction, the rights issue would be of importance. The rights holder can purchase the shares of the acquirer at half price.  Specifically, the rights holder would be entitled to pay the exercise priceExercise PriceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.read more and receive in return the shares of the acquirer’s common stock with twice the market value.

  • A flip-over poison pill is designed to provide additional compensation to the target company’s shareholders at the expense of the acquirer.It also has the effect of impeding the ability of a hostile bidder to acquire the target firm like a leveraged buy-out.

The most severe effect is that it can threaten the status of controlling shareholders or the acquirer. A flip-over will not dilute the acquirer’s interest in the target company but instead interest the acquirer’s shareholders in the acquirer.

The acquirer would be required to issue any additional shares to shareholders of the target company, and even a 100% owner can easily find themselves in the minority. The controlling shareholder may be unwilling to cause a threat to their status, causing the acquirer to forego the acquisition.

The flip-over poison pill is also suggested to be effective only if the acquirer insists on a merger or similar transaction post-implementation of flip-over. If the acquirer insists on maintaining a controlling stake in the target firm, no protection is offered since:

  • The dilutive effect of the flip-over rights is only triggered by a second step merger or business combination orA bidder willing to forego such a transaction can avoid negative consequences associated with the rights.

Example of Flip-Over Poison Pill

One of the popular instances was in 1985 when Sir James Goldsmith (Anglo-French financier, politician, and business tycoon) attempted to acquire Crown Zellerbach Corporation (an American Paper ConglomerateConglomerateA conglomerate in business terminology is a company that owns a group of subsidiaries conducting business separately, often in distinct industries. It reflects diversification of operations, product line and market to allow business expansion.read more based out of San Francisco, California). He faced a flip-over poison pill in which Sir Goldsmith attempted to acquire the firm. While he could not proceed with the merger transaction, he successfully obtained a controlling stake in Crown Zellerbach. As the goal of flip-over is to shield unwanted acquisition, the strategy was proven to be a failure.

Conclusion

The flip-over poison pill strategy has been designed to make the transaction unattractive to the acquirer until they end the deal or are compelled to negotiate terms with the Board of DirectorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more. This strategy is only used by firms that have adopted the bylaw.

If the poison pill were triggered, the flip-in rights would work for the benefit of the shareholders. However, Right holders would also retain the right to wait for a squeeze-out merger and exercise their rights in exchange for shares of the acquirer’s common stock.

This article has been a guide to Flip-Over Poison Pill. Here we discuss the flip-over strengths and weaknesses and the execution of the flip-over pill, along with examples. You may also take a look at the following articles:-

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