Flip-In Poison Pill

What is a Flip-In Poison Pill?

Flip in the poison pill is a kind of strategy in case the shareholders of the target company, not the shareholders of the acquiring company, are allowed to buy the target company’s share at a discount which helps the target company to dilute its share value.

There are five types of poison pillsTypes Of Poison PillsPoison 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 available to companies that act as defense strategies. Flip-In is one of these five poison pills. It is a defense strategy where the company’s existing shareholders are allowed to purchase more shares in the target company at a discount. The target company uses this Flip-In strategy to keep at bay hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more by diluting the company’s value with the increased available shares. It leads to a reduction in the percentage of ownership of the potential acquiring company. Only existing shareholders are allowed to purchase the shares, not acquiring shareholders.

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Breaking Down Flip-In Poison Pill

The Flip-In strategy is the provision mentioned in the company’s bylaws. If we consider a shareholder’s point of view, a Flip-In helps make quick money because the new shares are purchased at a discount. For the shareholders, this difference between the market price of the share and its discounted purchase price is considered the profit. So whenever a shareholder acquires a certain number of shares, generally 20-50%, then the Flip-In poison pill is triggered into action.

• Many experts give the logic that when the board of a company implements the Flip-In strategy, it lessens the number of potential offers, which help protect their positions in case the other company takes over. The position of the board is in an unstable condition.
• To secure their position and keep it stable, the company’s boards may prevent acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more by implementing this poison pill. But in the end, this strategy is bad for the company and its shareholders.
• The provision for a Flip-In poison pill can be found in its bylaw or charter, which says that they can use it as a takeover defense.
• Companies who want to fight this strategy can opt for dissolving this in court by giving a deep discount, but there is uncertainty about the chance of success.
• The right to purchase happens only before a potential takeover and when the acquirer crosses a certain threshold of obtaining the outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more.
• When the potential acquirer starts a poison pill by gathering more than the threshold level of shares, it risks discriminatory dilution in the target company.
• This threshold develops a ceiling on the amount of stock any shareholder can gather before being required to start a proxy contest.

Examples

• In 2004, when PeopleSoft employed the model against Oracle’s multi-billion takeover bid, the Flip-In poison pill was immediately implemented.
• The Flip-in poison pill that was implemented was designed in such a manner to make the takeover for Oracle more difficult. The customer assurance program, which was there, was designed to compensate the customer if the takeover happened. As per Andrew Bartels, a research analystA Research AnalystResearch analyst is a profession where the main task includes research on specific fields, analyzing the facts and figures, interpreting the analysis, and finally presenting the same to a structured audience that can relate to marketing, finance, operations.read more for Forrester Research, it became a financial liabilityFinancial LiabilityFinancial Liabilities for business are like credit cards for an individual. In simple terms, a financial liability is a contractual obligation that needs to be settled in cash or any other financial asset and are very useful in the sense that the company can employ “others’ money” in order to finance its own business-related activities for some time period which lasts only when the liability becomes due. The liabilities could be of two types, short term and long term.read more for Oracle.
• Oracle tried to opt for court dissolution for this case, and finally, it succeeded in December 2004 when it made a final bid of approximately $10.3 billion.

Flip-In Poison Pill vs. Flip-Over Poison Pill

• The Flip-In poison pill is the strategy that the target company uses to make it difficult for the acquirer company to gain control. This strategy is mentioned as a provision in the takeover candidate’s bylaws that allows the existing shareholders of the target company, excluding the acquirer, the right to purchase additional shares of the targeted company but at a discounted price.
• The Flip-in poison pill strategy is purely a defense tactic that dilutes the share price of the targeted company and the percentage of ownership the acquirer may already have.
• On the contrary, the Flip-Over poison pill is a strategyFlip-Over Poison Pill Is A StrategyFlip-Over Poison Pill refers to the defense strategy used by the companies in order to prevent them from the hostile takeover. The shareholders are allowed to buy the acquiring company’s shares at a discount with the main motive of combating the unwanted attempts of the takeover.read more that gives the existing shareholders of the targeted firm the rights to purchase shares of the acquiring company at a discounted price. It is implemented to protect against a second-step transaction. After the rights had been triggered, the target was sold or engaged in some other change in control transaction. In these circumstances, each right then outstanding will flip over and become a right to buy shares of the raider’s common stock with a market value equal to twice 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 of the right. The provision for this strategy must be included in the bylaws of the acquiring company. Implementing these rights comes into play only when a takeover bid arises.
• The Flip-Over poison pill encourages the existing shareholders of the targeted company to purchase shares of the acquiring company to dilute its share price. In contrast to the Flip-In provision, which dilutes the buyer’s interest in the target company, the flip-over provision creates a dilution in the interest of the buyer’s shareholders in the buyer itself.

Final Thoughts

The Flip-In poison pill provision deters the buyer from crossing the ownership threshold that eventually triggers the rights plan by confronting it with the prospect of substantial dilution. Every holder except the buyer can purchase the new shares at a 50% discount to the current market. The buyer’s ownership interest gets diluted if the flip-in strategy of the rights plan is implemented. The actual amount of dilution depends on the exercise price of the rights, but it is substantial enough to make triggering the rights economically unviable.

Flip-in Poison Pill Strategy Video

Frequently Asked Questions (FAQs)

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This article has been a guide to Flip-in Poison Pill Strategy. Here we discuss Flip-in’s meaning, practical examples, and its differences from the flip-over poison pill. You may also learn more about M&A from the following articles –

• Examples of Killer Bees
• Flip-Over Poison Pill
• Poison Pills