Investment Banking Tutorials
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Acquisitions Examples
- Horizontal Merger
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- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- Joint Venture
- Advantages of Joint Venture
- Types of Joint Venture
- White Knight
- Hostile Takeover
- Golden Parachute
- Poison Pills
- Killer Bees Defense Strategy
- Show Stopper in M&A
- What is Amalgamation?
- Spin off vs Split Off
- Forward Integration
- Backward Integration
- Horizontal vs Vertical Integration
- What is Divesting / Divestiture?
- Bootstrap Effect
- PAC MAN Defense
- Flip-In Poison Pill
- Flip-Over Poison Pill
- Scorched Earth Defense Policy
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Joint Venture vs Strategic Alliance
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
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What is Flip-Over Poison Pill?
Flip-Over Poison Pill is a defensive strategy which enables shareholders to purchase shares in an acquiring company at a highly discounted price. This gets triggered when a hostile bid is successful and strategy is commonly used to combat unwanted takeover attempts. If the technique is adopted and the acquisition turns successful, the target firms’ shareholders will dilute the equity of the shareholders in the acquiring firm.
Shareholders have rights attached to their shares whereby all shareholders except the acquiring firm can pay to exercise their rights. They receive a certain value of the acquiring company’s shares at market price on the transaction date. Typically it’s double the exercise price, giving the same two-for-one deal in a flip-in but with the acquiring company’s stock instead.
Strengths of Flip-Over Poison Pill
As flip-over is a poison pill strategy, below are some of the benefits which are may also be common to other similar practices as well:
- They are effective deterrents against hostile takeovers
- There is room for bargaining leverage and boards can choose not to enact such a strategy if the acquiring company is offering high enough bid or meeting conditions of the target firm.
- Extending the above point, target firms can get around 10-20% more from acquiring firms if a flip-over or similar strategy is in place.
- Boards also buy some time for either finding a “white knight” or strategies which can benefit the target company.
Weakness of Flip-Over Poison Pill
Similar to the strengths, certain drawbacks are also applicable:
- Shareholders may benefit from the takeover if the acquiring firm is paying more for their stock. The shareholders may consider the option, as the stocks were purchased at a deep discount.
- Certain managers may use such techniques to prevent their positions in the larger interest.
- The values of the firm can be questioned since the stocks may get diluted. Further, companies who desire to make some investments in the company would start questioning the techniques creating drifts and possibly lose out on large investment opportunities.
Execution of Flip-Over Poison Pill
As per this strategy, each right represents the conditional right to acquire shares of common stock of the hostile bidder at a discounted price. Once the event is triggered, the rights would detach from the shares becoming freely transferable. However, at that point, the rights would not be significant. It’s only if the acquirer was to attempt a merger/similar transaction would the rights issue be of importance. The rights holder can purchase the shares of the acquirer at half price. Specifically, the rights holder would be entitled to pay the exercise price and receive in return the shares of the acquirer’s common stock with twice the market value.
- Flip-over poison pill is designed to provide additional compensation to the shareholders of the target company at the expense of the acquirer.
- It also has the effect of impeding the ability of a hostile bidder to acquire the target firm like a leveraged buy-out.
The most stinging effect though is that it can threaten the status of controlling shareholder or the acquirer. This is because flip-over will not dilute the acquirer’s interest in the target company but instead interest of the acquirer’s shareholders in the acquirer.
The acquirer would be required to issue a large number of additional shares to shareholders of the target company and even a 100% owner can easily find themselves in the minority. The controlling shareholder may be unwilling to cause a threat to their status causing the acquirer to forego the acquisition.
It’s also suggested that flip-over poison pill is effective only if the acquirer insists on a merger or similar transaction post implementation of flip-over. If the acquirer insists on maintaining a controlling stake on the target firm, no protection is offered since:
- The dilutive effect of the flip-over rights is only triggered by a second step merger or business combination or
- A bidder willing to forego such a transaction can avoid negative consequences associated with the rights.
Example of Flip-Over Poison Pill
One of the popular instances was in 1985 when Sir James Goldsmith (Anglo-French financier, politician and business tycoon) attempted to acquire Crown Zellerbach Corporation (an American Paper Conglomerate based out of San Francisco, California). He faced a flip-over poison pill in which Sir Goldsmith attempted to acquire the firm. While he could not proceed with the merger transaction, he was successful to obtain a controlling stake in Crown Zellerbach. As the goal of flip-over is to shield unwanted acquisition, the strategy was proven to be a failure.
The flip-over poison pill strategy has been designed to make the transaction unattractive to the acquirer till a point they either end the deal or are compelled to negotiate terms with the Board of Directors. This strategy is only used by firms that have adopted the bylaw.
If the poison pill were triggered, the flip-in rights would work in the benefit of the shareholders. However, Right holders also would retain the right to wait for a squeeze-out merger and to exercise their Rights in exchange for shares of the acquirer’s common stock.
This has been a guide Flip-Over Poison Pill. Here we discuss the strengths and weakness of the flip-over and also the execution of the flip-over pill along with examples. You may also take a look at the following articles:-