What Does Poison Pill Mean?
A Poison Pill is a hostile takeover prevention strategy used to make the target company's stock look less desirable. There are typically two types of poison pills as noted below:
- Flip-In: a situation where current shareholders are given the opportunity to purchase target company stock for a discount; or
- Flip-Over: a situation where once acquisition occurs, current shareholders are allowed to purchase firm stock at a discount.
Divestopedia Explains Poison Pill
Flip-In and Flip-Over Poison Pills both discourage acquisition because the potential acquisition firm may not want to risk the stock value depressions.
A Flip-In works as an acquisition prevention method because not only does it devalue the target company's stock, but it also dilutes stock value through the issuance of new shares. This then can hurt the acquisition company because their stock is not worth as much in dollar value and they may not have the majority share position needed for acquisition anymore.
A Flip-Over can hurt the acquiring firm because immediately after acquisition, shareholders are able to purchase firm stock very inexpensively, again devaluing the company and diluting worth.