Poison Pills: Understanding Corporate Defense Tactics

A poison pill is a tactic sometimes used in an effort to prevent a corporate merger. If one of the companies seeks to avoid merging, that company can enact this policy to help discourage it. Here are the basics of what a poison pill is and how it impacts investors.

What Is a Poison Pill?

A poison pill is a move that will impact the ability to purchase stock. It can come in two different forms. With a "flip in" poison pill, the first company makes it so that everyone besides the entity trying to take over can purchase cheaper shares of stock. Therefore, it makes it much more difficult for the merger to happen because the other company has to spend a lot more money. With a "flip out" poison pill, the first company can make it so that investors can purchase the shares of the acquirer at a deep discount after the merger takes place.

Impact to Investors

These scenarios present definite advantages to the investors in most cases. You will be able to create a profit because you can buy shares of stock cheaper than you normally would be able to. With a "flip out" poison pill, you will often be able to buy two shares for the price of one.