Poison Pill

Hi guys,

can someone tell me if poison pills are actually good for shareholders?

Golden parachutes and greenmail are not correct?

While in theory they are supposed to protect shareholders from unscrupulous buyers, poison pills (rights plans) are often not good for shareholders. Hostile acquisitions are often good for shareholders, but bad for management (remember that hostile acquirers must get shareholders to accept their tender). Poison pills allow management to stymie the choice by shareholders to sell (often to make sure that management gets their golden parachutes).

Golden parachutes - again, in theory, they are intended to benefit shareholders (by making management indifferent to profitible acquisitions that they would otherwise oppose for personal reasons). However, they are often abused allowing management to loot the company on the way out the door and to deter otherwise good buyers.

Greenmail is buying up a large share of a company and deriving payments not to take over the company and throw out the management: good for the shareholders who sell out on the buy-up, not so good for the shareholders holding once the company starts paying out ransom payments.

According to the CFA institute (the only source that matters as far as the exam), they’re bad for shareholders because they make management-disciplining takeovers more difficult.

According to academic research, they can be good or bad for shareholders. In many studies, it depends on the strength of other governance mechanisms - typically if the firm is otherwise well-governed, they can be value-creating. But the methids used to measure these effects aren’t that powerful.

Good point. From here through Saturday afternoon, they’re bad.