Flip in the poison pill is a kind of strategy in case of which 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.
What Does Flip-In Poison Pill Mean?
There are five types of poison pills available to companies which act as defense strategies for companies. Flip-In is one of these five poison pills. This is a defense strategy where the existing shareholders of a company 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 value of the company with the increased available shares. This leads to a reduction of the percentage of ownership of the potential acquiring company. Only existing shareholders are allowed to purchase the shares, not the acquiring shareholders.
Breaking Down Flip-In Poison Pill
The Flip-In strategy is the provision mentioned in the company’s bylaws. So whenever a shareholder acquires a certain number of shares generally 20-50% then the Flip-In poison pill is triggered into action. If we consider a shareholder’s point of view a Flip-In helps in making 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 to be the profit.
- Many experts give the logic that when the board of a company implements the Flip-In strategy then it lessens the number of potential offers which help in the protection of their own positions because in case the other company takes over then the position of the board is in an unstable condition.
- So in order to secure their position and keep it stable, the boards of the company 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 Flip-In poison pill can be found in the company’s 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 the 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 point of obtaining the outstanding shares.
- When the potential acquirer starts a poison pill by gathering more than the threshold level of shares then it risks the 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.
Flip-In Poison Pill Example
Let us discuss an example of a Flip-in poison pill.
- In the year of 2004 when PeopleSoft was employed the model against Oracle’s multi-billion takeover bid then Flip-In poison pill was immediately put into action.
- The Flip-in poison pill that was implemented was designed in such a manner so as to make the takeover for Oracle more difficult. The customer assurance programme which was there was designed to compensate the customer if the takeover happened. This became a financial liability for Oracle as per Andrew Bartels, A research analyst for Forrester Research.
- 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
Rights plan include both Flip-In and Flip-Over features.
- The Flip-In poison pill is the strategy which the target company uses for making it difficult for the acquirer company to gain control over the company. 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 rights to purchase additional shares of the targeted company but at a discounted price.
- Flip-in poison pill strategy is purely a defense tactic which dilutes the share price of the targeted company and also 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. This strategy comes into play after the rights have 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. The implementation of these rights comes into play only when a takeover bid arises.
- The Flip-Over poison pill gives an encouragement to the existing shareholders of the targeted company to purchase shares of the acquiring company so as 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.
Flip-In 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 is allowed to purchase the new shares at a 50% discount to the current market and the buyer’s ownership interest gets diluted if the flip-in strategy of the rights plan is implemented. The actual amount of dilution is dependent on the exercise price of the rights but it is quite substantial enough to make triggering the rights economically unviable.
Flip-in Poison Pill Strategy Video
This has been a guide to Flip-in Poison Pill Strategy. Here we discuss the meaning of Flip-in along with practical examples. Here we also discuss the differences between flip-in poison pill and flip-over poison pill. You may also learn more about M&A from the following articles –