Flip-In Poison Pill

Article 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 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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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.

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

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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