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Poison Pills in Finance | Types | History | Example - YouTube
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clicking the Bell icon friends today we
are going to have a to tutorial on poison
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pills now what would you do if your
neighbor suddenly barges in and catches
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you off the card and seizes your house I
mean in all the probabilities you would
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use all your powers and put up a tough
fight right a Chinese philosopher soon
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Zuzu said invisibility lies in the
defense so the possibility of the
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victory in the attack so the defense
does not necessarily have to be a
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physical attack a razor-sharp defensive
strategies are good as lethal weapons
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while a neighbor seizing your house is
not something that is anticipated in the
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normal course of life hostile takeovers
in corporate landscapes is something
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very common in usual business parlance
an attempt to acquire a company without
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the approval of the board director is
termed as hostility usually unfriendly
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bit or corporate rate as hostile
takeovers an so called occurs when an
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investor suddenly buys a large number of
shares in a company with an intention of
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gaining controlling interest naturally
the target companies will not welcome
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this and design strategies to counter it
while there are various defense
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mechanism in place the most common ones
are called poison pills so let's dig
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deeper to understand the history of this
mechanism and story behind the corporate
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name now now let's understand what are
the reasons for the poison pills as you
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can see in the chart the activist
investors take change 26% safely
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friendly merger 5% routine
26 unsolicited 11% an
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activist close enough for so main reason
for adoption of the poison pill a poison
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pill is a popular defense mechanism for
target company when it uses shareholders
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rights as a tactics to make the hostile
acquisition deal expensive or less
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attractive for the Raiders
this strategy also acts as a tool to
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slow down the speed of the potential
hostile attempts in future poison pills
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are generally adopted by the
productive without the approval of the
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shareholder it also comes with a
provision that the right associate can
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be altered or redeemed by the board
required I mean this is torn indirectly
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compelled direct negotiations between
the equator and the board so as to build
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a ground for better bargaining power see
poison pill can pinch into two ways they
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could either make an acquisition very
hard nuts to the creek or they can have
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negative side effects that unfolds in
various stages so what are the common
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types of poison pills see poison pill is
an all-encompassing
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the term and there are various firms in
which it is triggered in practical
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corporate setting some of the widely
used tools out first preferred stock
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plan prior to 1984 when the hostile
takeovers just jarred their ugly head
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preferred stock plans who primarily uses
poison pills under this plans the
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company issues dividend of the preferred
stock to the common shoulders which
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comes with the voting rights preferred
stock holders could exercise special
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rights whenever outside does suddenly
bought the large chunk of shares second
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which called flipping in 1984 certain
other methods were also saw a light of
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the day one such tactics is flip in
poison pill when corporate raiders buy
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sizable holdings in a company flip is
one of the most preferred strike back I
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mean here the target company buys a
large number of the shares at a discount
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rate to counter the offer which
eventually leads to the dilution of the
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control of a acquire for example if an
investor buys more than 15%
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of the company's stock other
shareholders apart from the bidders buy
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increased number of shares so the
greater the additional shares purchased
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the more diluted the acquires interest
it is also it all basically it also
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increases the cost of the bill once the
bidder gets the hint that such a plan is
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been executed he may become cautious and
become discouraged to pursue the deal
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further it may also be possible that the
bidder then comes up with the formal
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offer to the board for negotiation
third flip over flip over is the
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opposite of flippin and happens when the
shareholders choose to buy shares in the
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acquirer company and after the merger
let's say the shoulders of the target
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company axis has the option of buying
two for one share in the merge company
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at a discount the option usually comes
with a predetermined expiration date and
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no voting rights
see diluting the acquirers interest to a
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significant extent makes it really quite
expensive and expecting if the acquirers
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back off the target company can redeem
those rights as well food back and right
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plan under this defense mechanism the
target company shuffles employee stock
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option plans and designs in in a way
that they become effective in the event
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of any unwelcome pain so this entails
providing shareholders a privilege to
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obtain shares with the higher-value if
the acquirer company takes a majority
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stake this way the acquiring company
would not be able to quote a lower price
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for these shares this is nothing but to
move to deter the acquisition however
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under exceptional circumstances if the
acquirer is ready to offer a great price
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the back and right plans fall through
fifth the golden handcuffs
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the golden handcuffs we all agree that
the employees are the biggest asset of
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the company golden handcuffs are nothing
but various incentive offer to the
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company to ensure that they stay on
usually golden handcuffs are issued in
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the form of deferred compensation
employee stock options or restricted
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stock which can be earned after the
employee reaches a particular
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performance threshold how or not many of
us know that golden handcuffs
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can be also be used as entity call
mechanism when an unsolicited bid
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happens the poison pills get triggered
the key staff becomes vested in the
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stock options and the golden handcuffs
our mood so these employees some with
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extremely rich experience and acumen and
now free to leave the company the
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acquirers will therefore lose the key
executives of the target company and
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this would make the part difficult for
them for him to beat red 6th is called
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the voting plants the design of the same
lines have preferred stock plans and
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flipping the tactics involves voting
right is a tool for controlling mechanism
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when a substantial block of shares is
obtained by the investor preference
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shares apart from from then the large
block holders become authorized super
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voting rights this makes it difficult
and unattractive to obtain voting
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control by the bulk shape or taser
let's see the trend of the poison pill
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adopted according to the market cap
let's see that and this will be till
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2014 so let's see that can you see the
graph over here the large cap with
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poison was close enough to 32% without
poison was 25% small Catholic boy
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poison was 41 and without 31
it's written over here the graph shows
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that till 2014 a major portion of the
small caps 41% as well as the large cap
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of 22% and the u.s. adopted poison pill
as a defense mechanism let's get into
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the history of the poison pill you know
after looking at all these numbers every
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phenomena in the world has no history
behind it and poison pills are no
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exception the blatant occurrence of
hostile takeovers and defense mechanism
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was in full momentum in 1980 hostile
takeovers become the order of the day
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beginning since 1970
corporate raiders like boone Pickens
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and Carla kahin sent chills down to the
spin of many corporate phones there are
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multi class defense tactics in this
place in 1982 M&A law Martin Lipton of
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Wachtel Lipton and Rosen & Katz he was a
knight in shining armor and invented a
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poison pill defense to prevent hostile
corporate rate goes according to the
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experts this was the most significant
legal developer in the corporate law in
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20th century the legality of the poison
pills has been a vague complete way when
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they were first came in the early 1980
though the Delaware Supreme Court
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advocated poison pill as a valid defense
tactic in its 1984 decision in moron
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versus the house'll International Inc
many jurisdictions jurisdictions outside
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the US that that considers poison pills
as illegal and place constraints on the
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applicability not exiting so what's the
story behind such an awkward name that
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dates back to the tradition of the EPI
not prevalent during the monarchical era
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wherever a spy was caught by an enemy he
immediately swallowed a red pill to
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escape the integration and revelation of
the truth so poison pills owes its name
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to its the to these practices let's take
a couple of example the first example
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I'll take is of Netflix
c-carly kahin an institutional investor
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cotton Netflix off-guard in 2011 by
acquiring 10% stake in the company
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the later is sponsored by issuing
shareholders right and as poison pill a
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move which worked call even to end I
mean to know an year later he cut his
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holding to 4.5% and Netflix terminated
its rights issue plan in December 2013
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I'll show you can you see this article
Netflix adopts poison pill to fend off a
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con
so Netflix on Monday said it adopted
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stockholders right plan okay so this you
can you can read the article a second is
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gain capital poison pill example that we
are going to take when fxcm Inc plan to
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acquire gain Capital Holdings Inc back
in the April 2013 again responded by
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triggering a poison pill rights were
decided to be distributed as divided to
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the common shares at the rate of one for
one of the company held by the
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stockholders upon occurrence of an
unforeseen event each right would
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authorize a stockholders to buy 100 of
the shares of a new series of the
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participating preferred stock at an
exercise price of $17
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which was later raised again there's an
article article for this and show you
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that the gain capital adopts poison pill
defense against the fxcm hostile
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takeover well it's written over here
well this is certainly didn't take long
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and should conform to over readers that
what we wrote yesterday namely fxcm gain
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capital friendly discussion had been
going on behind the scenes for quite
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some time between fxcm's and gain poison
pill mint before breaking down leading
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to a fxcm's unsolicited offer to acquire
gain capital made through a bear hug
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pair of is one such type letter to the
gains board so the gain capital out puts
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in place controversial shareholders
right plan the third example that I'm
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going to take is of micron tech poison
pill example the board of the director
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of micron technology in the larges US
memory chipmaker adopted a poison pill
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strategy in apprehension of the hostile
takeover the tactic was right issue that
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would trigger if an individual or group
acquire 4.99% or
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more of the company's outstanding stock
I'll show you the article for the same
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on so over here the micron gains as
poison pill sparks speculation its
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target in in the yellow highlighted it's
written micron boards of directors opted
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a poison pill a rights issue that would
be triggered if an individual or a group
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acquired 4.99% or more
of the company outstanding stock and
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micron said on Monday in regulating
filing so it's this is the article for
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the same the fourth one example Pier one
Imports for example example more
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recently in September 2016 Pier one
Imports Inc resorted to poison pill
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measures when the hedge fund from Adam
global capital LLC disclosed 9.5%
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stake in the form of the
agreement entitled every common
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stockholders the right to buy a fraction
of the junior preferred stock at a price
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of 71.5 the preferred
shares would have similar wording terms
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to common stock diluting the control of
any shareholders capturing the pic state
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I'll show you the article for the same
can you see the article P1 imported of
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suppose in pill measures and it has
written the agreement attaches every
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shares of the common stock to buy a
fraction of junior preferred stock at
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17.5 now let's see some
of the advantages and disadvantages of
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poison pill first advantages a poison
pill is a strong defense mechanism for a
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target company allowing company to
identify fruitful acquisitions and
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discourage actions of corporate raiders
the poison pills also acts as a speed
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breakers of potential rates the spin-off
effect are usually positive and could
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lead to shareholders earning higher
premiums if an acquisition is favorable
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second poison pills are usually
triggered as a negotiation technique
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okay to clinch a sweat a deal it allows
company to buy a time and grant
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management the dictate terms any
takeover in any manner that is most
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lucrative for them let's see some of
that this one disadvantages poison pill
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has the power to adversely impact the
shareholder value the Flippen leads to
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more purchaser at lower share price
large number of shares in packets
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valuation example I'll give you in 2008
Microsoft offered Yahoo shareholders 31
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per share representing a 62%
premium at the time but pulled out its
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hand after being stung by the poison
pill yahoo shares price took a hit since
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the proposal and its head Jerry Pinto
also lost his position why shareholders
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value lost you to the poison pill and
show you that shareholders value lost
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you to poison pill recent example you
can see offer amount in the first one
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target stock price was 66%
subsequent stock at stock price one day
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3 or 30 day and 90 day 80 to 93
and 94% declines so there was a
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severe decline of all the all these
companies you can see Yahoo is also they
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scan desk some of the known companies so you can see it has some negative impacts
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to you can defer the a chart of and you
can have a clear idea about virtual
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companies were involved
no poison pill always is it they tell
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sometimes feet I mean that's what
question who asking you hostile
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takeovers and defend mechanism cannot be
classified in black and white
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compartments see there are certain gray
areas also not all takers are bad either
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neither all day cause defense mechanism
is in the best interest of the company
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so some of these investors have
significant knowledge of the industry
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and company affairs sometimes much
better than the company's management
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itself so couple trades or hostile
takeovers have manifested themselves in
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a relatively constructive form called
investor activities activism does this
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any act of the investors to influence
corporate paths for shareholders
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long-term goal is viewed as activism
according to the S&P Capital IQ the
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agendas vary among the investors and
focus on these specific areas including
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cost reduction reorganization corporate
spin-off revamped financing structures
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greater leverage and more shareholder
oriented uses of cash and liquidity to
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realize higher enterprise value in the
public market now as we can see that the
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practice that took corporate world by
storm in 1980s is relevant even today
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S&P Capital IQ stated that from 2005 to
2009 89 activated activist actions
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occurred while in the past 5 years
from 2010 to 2014 341 actions took place
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so there has been volume increase in
each year since 2010 and the trend has
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sustained itself strongly in 2015 I will
show you some details on the same this
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is the investors activism per sector
over the past decade as you can see the
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consumer direct but discretionary and
the consumer staples energy financials
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the major was seen in consumer
discretionary data and then post
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financials so investor activism part of
per sector over the past decade has been
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mentioned over here in this particular
graph before ascertaining whether poison
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pill are doing any good to the company
we need to understand that any company
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has many stakeholders and each of them
is affected in different way during the
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potential takeover she always have a
security interest in its maximizing the
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value of the competition Board of
Directors have different financial
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stakes and responsibility towards the
company and the shareholders at the same
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time corporate executives will also have
ownership in the company may either
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stand to gain or lose from the takeovers
other company employs usually at a lower
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and middle level stands to lose most of
its time as a result of the
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murder news of acquiring companies
announcing mass layoffs during the
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mergers also not unheard of so let's
make a quick conclusion on this it is
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difficult to conclude whether a poison
pill is actually beneficial or not it
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all depends on the long-term goals of
the both the companies understanding how
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a company responds to a hostile
takeovers with poison pill or the
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defense can reveal greater truths about
how a company tackles criticals issues
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pertaining to the management in itself
so that's it for this particular topic
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