Tuesday, November 22, 2016

What is a Corporate Poison Pill?

A poison pill is a strategic move by a takeover Target company to make it's stock less attractive to an acquirer. This strategic tactic makes it less attractive for someone to want to buy out a company; generally a public company. For instance, a issuance of a new series of preferred common stock that give shareholders the right to redeem it at a premium price after a takeover. Such a poison pill will raise the cost of an acquisition due to the acquiring party having to pay for the preferred stock after the acquisition, and hopefully will deter a takeover bid. Other forms of poison pills can be found in executive compensation packages, sometimes commonly referred to as golden parachutes, some poison pills come in the form of compensation agreements or severance packages for which any acquiring party would have to compensate the current executive board a set amount of money if the company is purchased and the executives are replaced. This again raises the acquisition cost and makes a company less attractive for a takeover bid.

Why are poison pills important to public company CEOs and Penny Stock investors?
Regardless of whether the company is a penny stock or not the company and their executives can shield themselves from hostile take-overs.  Hostile take-overs from corporate raiders and shareholder activist can kill the plans of current executives.  This tends to come around the time when:
  • companies have large cash position or,
  • have intellectual property that another company wants or,
  • has positive cash flow or,
  • in most cases when a party from the outside looking in thinks the corporate assets are worth more than the current market cap of the publicly traded stock.
Poison pills when established correctly can make it so anyone trying to take over the company will have to buy-out management's prior contracts.  If these contracts are tied to the current management or there is a per-existing legal contract which states compensation is to be made upon the acquisition of the company by external parties; then you have a poison pill. 

Hope this was helpful,

-Nick Coriano

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About the Author: Nicholas Coriano is a Business Consultant.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and is currently a partner at Cervitude Intelligent Relations, which specializes in Investor Relations for companies valued under $1 Billion USD.

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