I’m having difficulty understanding the concept of the poison pill.
So the fill-in pill gives shareholders the option to buy shares of the target company at a discount. My question is, doesn’t this provide an arbitrage opportunity whereby shareholders could buy shares at a discount while simultaneously opening short positions for the full share price? Also, if the acquiring company is also a shareholder, does the acquiring company have the ability to buy shares at a discount?
For the flip-over pill, shareholders of the target get to buy shares of the acquiring company at a discount. How does this work? Does the target company subsidize share purchases of the acquiring company? How do they obtain that stock at a discount?
For the flip-in - company X buys company Y for $40 per share. Company X shareholders have the right to buy company Y’s shares of company X for $30 per share. This will make a bid for your company more expensive as it implies an additional premium to the bid for your company (in this case 25%). Its important to understand the chronolgy of these actions to understand why a short position doesnt make sense, because you are getting those aribttrage profits without taking a short position!
Use the same thought process for a flip-over but understand the relationships and the chronolgy.
My understanding of a flip-over poison pill is that it’s a negotiating tactic: the target’s management negotiates with the acquirer’s management for the target shareholders to be able to buy the acquirer’s shares on the cheap; if the acquirer’s management balks, the negotiations halt.
It seems a bit weird.
The poison pill is a defensive strategy used against corporate takeovers. Popularly known as corporate raiding, takeovers are hostile mergers intended to acquire a corporation.
Thanks Magic, that makes a litle more sense - essentially the poison pill is a negotiation tactic that the target’s management uses. But if granting the poison pill is at the acquirer’s discretion then how does this thwart a takeover attempt - the target is subject to the mercy of the acquirer either way.
@rkaptyn - my question is how target’s management brings about a reduced share price for the acquirer’s shares (or their own shares). So in your example, company X shareholders can buy company Y for $30 instead of the market price of $40. Who decided they can buy company Y below market? Is this something that company X negotiates with company Y? And if company Y has the discretion to approve/deny this request, how does this help company X - they seem to be at the mercy of company Y either way. Also, I’m not sure what you mean by understanding the chronology. If company Y (or company X) shares are selling on the market for $40 but are available to existing shareholders for $30 then to recognize the arbitrage profit that seems to be so blatently obvious to me the shareholder needs to buy at $30 and immediately sell at $40, but maintain their long position so as to still be “shareholders”. This would require a short position. If they simply buy the discounted shares and those share subsequently decrease in value then the unrealized profit they had at purchase could disappear. Hence to be true RISKLESS arbitrage there needs to be a sale at the same time as the buy.