Poison Pill

Key Highlights

• A poison pill is a clever move companies use to protect themselves from being taken over by an unwelcome buyer, making the takeover more difficult or expensive.

• Common types of poison pill include flip-in, flip-over and golden parachute.

What is Poison Pill in Finance?

A poison pill is a clever move companies use to protect themselves from being taken over by an unwelcome buyer, making the takeover more difficult or expensive. It makes buying the company too expensive or unappealing for an aggressive bidder. If someone tries to take over by buying too many shares, the company lets other shareholders buy extra shares at a big discount. This floods the market with new shares, diluting the bidder’s control and driving up their costs.

Common Types of Poison Pill

• Flip-In: Current shareholders (not the bidder) can buy discounted shares, watering down the bidder’s stake.

• Flip-Over: Shareholders can buy shares in the bidder’s company at a discount if a merger happens.

• Golden Parachute: Provides large compensation packages to top executives if the company is acquired, increasing the overall cost for the acquiring firm.

Why It Matters?

It scares off hostile buyers, pushes bidders to negotiate with the company’s board, and buys time to protect shareholders and explore better options.

Example: If a company triggers a flip-in poison pill, shareholders might buy new shares at half price, making it harder and pricier for the bidder to gain control.