I’ve heard of corporations putting ‘poison pills’ in place to stop takeovers. What is it?
Poison pills are rules in the company’s bylaws that allow shareholders of the acquired company to buy shares of the company or the acquirer at a steep discount.
The goal is make hostile takeovers too costly for most companies to swallow, and if one does, to fatten the shareholders wallets. Since managers are often very large shareholders, this works out quite well for them.
There are several variants, but the common idea is some mechanism that makes an aquiring company have to pay too much money for the takeover to be attractive, triggered by the attempt to accumulate large amounts of the company’s stock, and spelled out in the stockholder rights plan.
As an example, E-Trade has apparently instituted one recently. If anybody tries to acquire more than 10% of E-Trade, the board is authorized to flood the market with new expensive preferred shares, which would have to be bought as well:
Thanks you three! Investopedia answered a couple other related questions I had.