Can someone please explain golden parachute,poison pill,green mail and any other obsure term related to takeover defenses? thanks
Is this a general question or is this in syllabus. Im confused coz it was not mentioned anywhere in the schweser notes i read so far…well then im still not done with the syllabus 
Greenmail: A situation in which a large block of stock is held by an unfriendly company. This forces the target company to repurchase the stock at a substantial premium to prevent a takeover. It is also known as a “Bon Voyage Bonus” or a “Goodbye Kiss”. Poison Pill: A strategy used to discourage a hostile takeover by another company. The target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills: 1. A “flip-in” allows existing shareholders (except the acquirer) to buy more shares at a discount. 2. The “flip-over” allows stockholders to buy the acquirer’s shares at a discounted price after the merger. 1. By purchasing more shares cheaply (flip-in), investors get instant profits and, more importantly, they dilute the shares held by the competitors. As a result, the competitor’s takeover attempt is made more difficult and expensive. 2. An example of a flip-over is when shareholders have the right to purchase stock of the acquirer on a 2-for-1 basis in any subsequent merger. Golden Parachute: Lucrative benefits given to top executives in the event that a company is taken over by another firm, resulting in the loss of their job. Benefits include items such as stock options, bonuses, severance pay, etc. A golden parachute can be used as a measure to discourage an unwanted takeover attempt. Investopedia helps…
They are mentioned in Book 4 Shweser, without definitions. You can get an idea on a couple of the terms from the last question in that section
and wikipedia…
All we need to remember regarding them (for L1 atleast) is that, they are some of the defensive techniques that corporations can execute to avoid a hostile takeover. That’s how I remember them. Or do we need to know the subtleties and the minutia? - Dinesh S
I wouldn’t think you need to know the subleties for L1 exam, but if the goal is to someday become an analyst (or trader or someone who drills into companies) it is helpful to understand what these things are. I was in a friend’s office–he’s a charterholder and runs a long/short portfolio of consumer product stocks. I mentioned I saw on the tape that Wrigley’s had issued some "B"class of shares with voting rights for all holders of regular shares as of several days earlier. My buddy said, “poisin pill.” And immediately started making phone calls to sell side coverage to find out whether there was a hostile bid in the offing. So you never know…
Actually, the reason I am asking is because I got a direct question asking for the definition of one of those terms (I can’t remember which) on the CFAI sample exam. And for those suggesting investopedia and wiki…yea I know those…I was hoping for more of a CFAI definition…or more like what they expect us to know about it. For example Schweser book 4 and your definition of Greenmail differ a little.
There are so many “good-to-know” things out there. But with so little time in hand and so much to cover, might as well settle for what’s there in the curriculum. The other day, I got some question on Say’s Law, and I don’t know what to ‘say’ about it? It is nowhere in the LOS. - Dinesh S
I find it funny that golden parachutes are considered a defense against a takeover attempt. There’s no reason why it couldn’t work the other way either… It’s the same thing with executive compensation as a potential solution to the principal/agent problem. It’s not like there’s a shortage of self-serving executives out there.
I agree with Dimes27. Why is a golden parachute considered to be a takeover defense. If I was the CEO equipped with a golden parachute, I couldn’t care less about a takeover. If there was one, I’d lose my job but would still receive a huge severance package. So where is the incentive for the CEO to prevent a hostile takeover given he/she has a golden parachute?
Thanks for clearing things up.
Did the CFAI stop providing ciriculum or are you too lazy to seek it out?
@Geo The CFAI material does not define the term golden parachute. Would you be so kind to explain the reasoning behind it. I looked up the investopedia definition, but cannot follow their reasoning due to the reasons I mentioned in my previous post.
If its not in the CFAI ciriculum, its not on the test. That said, Golden Parachute is a takeover defense at it would create a payout that would have to be made by the new owner, likely immediately on a change in control. Sometimes these parachutes are so ridiculously expensive that it makes it impossible to take over the firm at a reasonable price.
Thanks a lot.
For what it’s worth, all of these terms are covered in Level II Corporate Finance.
Be patient.
^ Its all a blur to me now.
I actually did a dissertation on corporate governance many years ago. There was then (and still is) a lot of discussion on whether golden parachutes hinder or enable takeovers. I’m surprised CFAI still takes the position that they’re ONLY an antitakeover device. CEOs often get screwed in a takeover if they aren’t given a role in the combined entity. So, giving them a GP makes them less likely to opposse a takeover, since they get paid in the event of a successful takeover. In fact, if they’re lucrative enough, they might even actively shop for suitors for their company.