Poison Pills – A Weapon against Hostile Takeover

A hostile takeover is one in which the target company management is unwilling to agree for the takeover by the acquirer. Poison pill in finance refers to a technique where a company tries to avoid a hostile takeover, under this technique the company which is under threat or Target Company tries to make the stock price less attractive to the acquirer. There are basically two types of poison pills –

  1. Flip in Poison pill – This option allows the current shareholders to buy additional shares of the company at a discount to market price; hence anybody can purchase the shares of a company except the company which is acquiring the company.
  2. Flip over Poison pill – This option allows the shareholders of the company to buy the stock of acquirers at a heavy discount to the market price. If the existing shareholders of the target company are not able to buy than it will result in takeover of a company by the acquirer.

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