What Is a Poison Put?

A poison put is a takeover defense strategy in which the target company issues a bond that investors can redeem before its maturity date. A poison put is a type of 澳洲幸运5官方开奖结果体彩网:poison pill provision designe꧋d to increase the cost a compan🔯y will incur to acquire a target company.

How a Poison Put Works

Executives can employ a number of different strategies when defending their company from a 澳洲幸运5官方开奖结果体彩网:hostile takeover bid. Poison pills are one such strategy and are designed to make the prospect of acquiring a company through a 澳洲幸运5官方开奖结果体彩网:takeover bid e𒊎xpensive and less likely to occur. This type of takeover defense is legal, though company executives still have a duty to act in the best interest of shareholders.

Poison puts are a type of poison pill defense in which 澳洲幸运5官方开奖结果体彩网:bondholders are provided with the option of obtaining repayment in the event that a hostile takeover occurs before the bond’s maturity date. The right of early repayment is written in the bond’s covenant, with the takeover representing the trigger event.

Benefits of a Poison Put

During a hostile takeover, an acquiring entity—usually a rival company or an 澳洲幸运5官方开奖结果体彩网:activist investor—attempts to take control of a publicly traded company without the approval of the company's 澳洲幸运5官方开奖结果体彩网:board of directors. The board has certain strategies at th💙eir d𒈔isposal they can enact to thwart the would-be acquirer.

The poison put can be an effective strategy for the target company because it means the acquirer will have to spend more money to take control of the company. Thus, companies looking to complete a hostile takeover must balance the cost of acquiring a controlling interest in the target company with other 澳洲幸运5官方开奖结果体彩网:acquisition costs.

A poison put is different than other poison pill defenses in that it does not affect the number of shares in the market, the price of shares, or the voting rights afforded to shareholders. It instead directly impaꦕcts the amount of cash that an acquired company has on hand by shifting bond obligations from the future to the date at which the hostile takeover occurs. The acquiring company must be sure that it has sufficient cash to cover the immediate repayment of bonds.

Alternatives to a Poison Put

Poison put is not the only tactic companies use to disrupt or prevent hostile takeovers. Several other mechanisms have proven succ🦹essful at thwarting these undesirable acquisitions.

Crown Jewel

A company executes the crown jewel defense when it sells off its most valuable assets, also knowജn as the crown jewels, to make it appear less attractive to the acquiring company. The👍 crown jewels of a company are the revenue-driving assets.

To enact the crown jewel defense, the target company sells its assets to a white knight—a third party that acquires a company under more favorable terms than the hostile 澳洲幸运5官方开奖结果体彩网:black knight. Under this technique, the white knight typically ꩲagrees to sell the assets back to the target company after the hostile takeover i🍷s terminated.

Stock Acceleration

Much like the poison put option, stock acceleration, also known as triggered-option vesting, is a technique used to ward off hostile bidders by making the company less attractive and more expensive to acquire. Under this strategy, employees' unvested stock options vest fully and, subsequently, must be paid by the acquiring company when a specific event occurs.

The acquisiti🥂on is the event that precipitates the accelerated vesting. Therefore, if the sale does not occur, the vesting schedules remain as is. If the acquisition completes, the company may encounter difficulty retaining talented employees whose conti✨nued employment may have been largely based on their percentage of vesting.

Pac-Man Defense

Target companies employ the 澳洲幸运5官方开奖结果体彩网:Pac-Man defense to reverse the takeover; under this strategy, the target company seeks to take over the hostile bidder. The acquiree becomes the hostile bidder by obtaining a controlling number of the acquirer's shares. This not only threatens the acquisition but also the 🅺acquirer's company.

Like its arcade game namesake, the Pac-Man strategy gives the target company, through the use of power, the ability to hunt and consume those who initially targeted them for consumption. To be effective, 🧸the target company must have enough power, or resources, to take over the hostile company.

Example of a Poison Put

A company's board of directors believes that a larger competitor may attempt to acquire it in the future. As a defense, the company incurs new debt by 澳洲幸运5官方开奖结果体彩网:issuing corporate bonds. As part of the newly issued bond, the board includes a poison put covenant, which is a provision that stipulates bondholders can receive early repaym🌠ent of the debt should a trigge🦋ring event occur, such as a hostile takeover.

The total value of the bonds is $50 million. For the competitor to successfully acquire the company, it must not only be able to afford the purchase of a 澳洲幸运5官方开奖结果体彩网:controlling interest of shares but also afford a potential immediate repayment of $50 million to bondholders. If the acquirer does not have the money to pay this additional acquisition cost, they may need to withdraw their hostile takeover attempt, which means the poison put strategy was effective for the target ꧟company.