Flip-In Poison Pill

Updated on May 23, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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 pills 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 takeover 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.

Flip-In Poison Pill

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Key Takeaways

  • The flip-in poison pill is a defensive strategy that enables target company shareholders, rather than acquiring company shareholders, to purchase target company shares at a discounted price, thus diluting the value of the shares.
  • The flip-in poison pill is used as a defense mechanism, allowing existing shareholders of the target company to purchase additional shares at a discount to prevent a hostile takeover and dilute the value of the company’s shares.
  • Companies can use five types of poison pills as defense strategies, including the flip-in poison pill.

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 acquisition 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 shares.
  • 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.

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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 analyst for Forrester Research, it became a financial liability 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 strategy 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 price 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)

1. What are the benefits of a flip-in poison pill?

The flip-in poison pill is a takeover defense mechanism that can be implemented by a company to deter hostile takeovers. One benefit of this tactic is that it allows existing shareholders to purchase additional shares at a discounted price, making a hostile takeover less attractive. Another benefit is that it can give the company time to explore alternative options, such as finding a friendly bidder or implementing a restructuring plan.

2. What is the limitation of a flip-in poison pill?

Despite its benefits, there are limitations to using a flip-in poison pill. One limitation is that it can dilute the value of existing shares, which can concern shareholders. Additionally, there is a risk that the poison pill could be triggered even when a takeover would benefit the company and its shareholders. This could lead to missed opportunities for the company and a loss of shareholder value.

3. Who introduced the flip-in poison pill?

The flip-in poison pill was first introduced by the law firm Wachtell, Lipton, Rosen & Katz in the 1980s. Specifically, the tactic was used in response to the attempted takeover of General Motors by Ross Perot in 1984. Since then, the flip-in poison pill has become popular for companies seeking to defend against hostile takeovers.

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 –

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