Poison Pill Defence Strategy – 4 Case Studies (Detailed Analysis)

Poison pill is a defensive tactic employed by a target company to avoid an unfriendly takeover by another company. Poison Pill words came from the world of spying where agents/ spies are taught that it is better to have a poisonous pill rather than risking arrest by enemy camp. The following are different Poison Pills used by target company depending on situation. Each of this Poison Pill harms financially the target company, if implemented, but avoids the hostile takeover ( avoiding arrest by enemy camp) –

1. Issue of convertible Preference shares: This works bothways. It reduces the stake of prospective acquirer because of increase in number of shares in view of conversion. Secondly, it enhances cost of acquirer in M&A making less lucrative for takeover.
2. Right Issue: When prospective acquirer already holds 20% or more of the target, this Right Share provision kicks in. This gives right to the existing shareholders of target company to buy extra shares at substantial discount before takeover. This dilutes the already acquired % of acquirer to lesser % because of increase of volume of additional shares. Moreover, the cost of merger increases making it impossiable to takeover the target company.
3. Bond/Debenture Issue: This will be issued if takeover kicks in. It will make the merger encumbered and all feasibility of merger will be defeated making merger less juicy/ attractive.

Four Case Studies are produced below to show how in real corporate world, Poison Pill worked in the past.

How the name originated?

Case Study No.1 – Mesa Petroleom Vs, General American Oil Company T. Boone Pickens, legendry Oil Tycoon, chairman of Mesa Petroleom was looking to buy General American Oil. Algur Meadows, the founder chairman of General American Oil Company (GAO) of Texas died in 1978. Mesa Petroleum purchased 5% of the share of the company GAO as a first move of taking over the company. It made a tender offer to the shareholders of GAO that the Mesa Petroleum company will agree to purchase 13 million shares, or 51.2 percent of GAO’s shares @ $40 a share. Trustees of the Meadows Foundation, which owns 26 percent of the (GOA) stock was representing management. On being approached by Mr. Pickens, the directors of the trust expressed that they could sell if they get offer at $50 per share. Mr. Pickens felt that price at $50 per share was on higher side considering that oil and gas market was in bad shape at that time and the price should be between $35 to $40 a share. It was deadlock and there is all possiability that Mesa Petroleum may pick shares from market from shareholders who were willing to sell at $40.

Martin Lipton’s law firm named Wachtell, Lipton, Rosen & Katz in New York was advisor of GAO. Martin advised GAO company’s Directors to immediately issue in the market with new right shares. With this move as per advise of Martin Lipton, volume of supply of GAO’s shares in the market increased substantially. The 5% shareholding of Mesa Petroleom got diluted. In case if Mesa Petroleom still wants to takeover, it will have to buy more shares than original quantities of shares making taking over more expensive. Mesa Petroleum’s hostile takeover attempt got aborted courtesy Martin Lipton, the M & A lawyer. At that time, it was unique move and instantly became popular and named Poison Pill. Thereafter, this Poison Pill strategy was made as a part of legislation in America and was first time used in the litigation of Moran v. Household International in 1985.

Case Study 2: The Netflix Vs. Icahn Enterprises

Carl Celian Icahn is an American investor and founder of Icahn Enterprises, a public listed investment company in New York City. In 2012, he was holding 9.98% of shares of Netflix. He said that he was going to increase his shareholding in the company and ultimate object is to takeover the company. He opined that Netflix was undervalued and a good target for takeover. He also said that Netflix is a case of poor governance.

His proposed move virtually, was an attempt of forceful takeover. Since he was infamously known as hostile takeover man, it was become panic situation for Netflix. They called a board meeting and passed a resolution of Poison Pill in the form of Right issue.

The poison pill will be in motion when an investor holds 10% or more of Netflix’s shares – or 20% in the case of institutional investors if those holding are not without approval of board of directors. This poison pill plan will be valid for three years. In the plan, the right share will be one is to one basis. With such poison pill, Netflix could make the takeover more costly for Icahn and avoided a hostile takeover.

Icahn of Icahn Enterprises reacted saying that any such poison pill should have been subject to approval of shareholders through a meeting not by a board of director meeting only and this speaks of poor governance.

After Icahn declared in 2012 that he has 9.98% holding in Netflix, the share price skyrocked 390% in market price and after one year of announcement of poison pill as explained above, in October 2013, Icahn disposed of 4.5% of his holding (3 million shares) and pocketed profit of about $800 million. After sale of 4.5%, since Icahn thereafter had only 4.48%. Netflix was out of danger.

Case Study No.3 – Oracle Vs.PeopleSoft (Poison Pill)

In 2003, PeopleSoft was dominant in Payroll and HR area market share while Oracle had sizeable market share in Financials. Each other were penetrating in other exclusive space. This was a threat for Oracle.

If takeover by Oracle materializes, after SAP, Oracle will be number two software maker (corporate database business) of corporates who use to manage their finances, human resources, sales and customer relations

Two Poison Pills in People Soft

1. First, in 1980, PeopleSoft put a poison pill, whereby in case any company takes a stake of minimum 20% in People Soft, poison pill will be implemented and million of new shares of the company will be issued.

2. Second, poison pill is un-orthordox, unique, innovative and never heard of. This poison pill was inserted in June, 2003 after Oracle declared that they will dump PeopleSoft products if takeover materializes. The second Poison Pill was introduced to assure customers of continued after sales service. “Customer assurance program which give assurance its customers refunds of as much as five times the license price in the event the companys products are not supported after a takeover”. PeopleSoft’s customer assurance program would be in motion in case the company is taken over within two years and after sale service is off within four years.

Oracle’s tender offer was sent to shareholders of PeopleSoft on June 9, 2003, as a $16-per-share, $5.1 billion cash bid. On 12 June, PeopleSoft Board declined the offer and advised the shareholders to follow suit. PeopleSoft communicated that offer is at the bottom and no match considering the stature of the company. Both the poison pills taken together made deal price costly by $2 billion. Obviously, Oracle was insisting that both the pills be eliminated. Oracle realized that with these two poison pills, it will be impossiable to be successful in takeover because of unviability.

To add fuel to fire, Oracle announced that it will dump PeopleSoft’s products after takeover. Keeping in mind to eliminate the two Poison Pills, on June 18, Oracle revised offer upward to $19.50 per share, or $6.3 billion. PeopleSoft declined again the revised offer of $19.50 per share. Thereafter, Oracle further upped the offer to $24 per share ($7.75 Billion). PeopleSoft founder Dave Duffield rejected saying Oracle still discounted the valuation of the company. At this point of time most shareholers agreed to sell their shares at $24.

Thereafter, Oracle upped the price to $26.50 per share {$10.30 Billion). PeopleSoft accepted offer for $26.50 per share, that was 66% more than $16 first offer. It was an unfriendly takeover which people Soft agreed because final price was to its satisfaction and resentment started among shareholders who agreed at $24 a share.

Case Study No.4 – L&T Vs. Mindtree

Recent Hostile Takeover in India SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) by Regulation 3 has not made any distinction between friendly or hostile takeover. It is a liberal provision in favour of prospective acquirer. Not a word about defences of target company. Hence, there is no bar in imposing Poison Pill by a target company. SEBI Regulation 3 only mentions that a public announcement is necessary for acquiring more than 25% of the shareholding by an acquirer.

Recent hostile takeover of Mindtree by L&T, is the first hostile takeover after overhaul of Takeover Code,2011. After buying 20.32% (less than 25% as per Regulation 3) from one of the promoter, they made a public announcement of further buying 31% from shareholders @ Rs.980 per share inspite of vehement protest by other promoters. Further, L&T bought additional 15% from market making it holding of of 66.32% (20.32% +31% +15%). This hostile takeover got approval of SEBI.

Before that Mindtree intimated to stock exchanges that it was holding a board meeting to consider a buy back to prevent hostile takeover. This is not an usual poison pill. We have discussed so far USA corporate cases of issuing right shares to shareholders at a discounted price if the acquirer takes a stake over may be 10% or 20% to make the deal price costly. Share buyback are meant for increasing EPS of shareholders, improve return on net worth and return on capital besides enhancing shareholders’ value. However, Mindtree did not go ahead with the share buyback plan ultimately obviously because share buyback plan as per law can not buy more than 10% without special resolution and maximum 25% with special resolution. Buyback such low % can not stop a hostile takeover and L&T unopposed took control of the company.

Author – CMA (Dr.) Subir Kumar Banerjee