I’ve known that flip-over poison pills will allow the target’s shareholders to purchase deeply discounted shares of the acquirer. Some say that this will dilute the acquirer’s existing shareholder interest and hence helps deter the hostile takeover. I don’t see why this is so. Can anyone help me explain?
If a flip-over poison pill is activated then it will mean the share price of the acquiring firm would fall and the existing shareholders would face substantial dilution. So it makes it less attractive for them to pursue the takeover.
Another way of looking at it is to say that the synergies required for the takeover to be beneficial to the acquiring firm shareholders would be be higher than if no flip-over poison pill was in place.
As per assumption (please correct my understanding if it’s wrong), when the pill is activated, the target’s management will go out to the open market to buy the acquirer’s shares and then re-sell them at a deeply discounted price to its shareholders. Therefore, I don’t see any dilution here unless we’re assuming that the target’s shareholders will take advantage of this arbitrage by immediately and/or simultaneously selling the shares to the open market. This will put pressure on the price. But this assumption is not necessarily the case and the selling force has to be very strong to push the share price down.
I don’t believe that’s the process. As I understand it the target firm shareholders have rights attached to their shares which allow them to purchase the acquiring firm shares at a deep discount. So they aren’t purchasing them at market value then selling them on, they are buying them at a substantial discount.