Poison Pill Popping

The latest hostile takeover defenses defy the usual justifications.

With stock prices down, poorly performing companies are more vulnerable to hostile takeovers. So it comes as little surprise that an increasing number are popping poison pills, a familiar takeover defense mechanism. What is surprising are the terms of some of the latest deals.

Poison-pill provisions are triggered when a hostile suitor acquires a predetermined percentage of company stock. At that point, all existing shareholders except the suitor are granted options to buy additional stock at a dramatic discount, thus diluting the acquirer’s share so as to head off a change in control of the company. The measures are usually used in combination with staggered board terms so that hostile suitors can’t quickly replace enough directors to revoke the provision. According to statistics from Thomson Financial Securities Data, 140 companies adopted poison pill provisions in the first half of 2001, up 45 percent from the same period last year.

PILLS FOR SALE

Patrick McGurn, vice president of Institutional Shareholder Services, a proxy advisory firm in Rockville, Maryland, isn’t surprised at the burst of new activity. “When M&A activity is down, bankers and investment lawyers have to keep the fees up, so they go around and sell companies on these poison pills,” he says. “Also, there’s an increasing sense of insecurity out there right now. Companies are just really afraid that their stock isn’t coming back up.” That’s especially true in the tech sector. Of the total number of pills adopted during the first six months of the year, 46 percent were put in place by technology companies, compared with just 23 percent in 1999 and 35 percent in 2000.

Among the firms that have adopted pills in the past year are Commerce One, whose stock was down to 3.1 on August 17 from a 52-week high of 84 on September 29, 2000; E-Trade, down to 6 from a high of 20 on September 6, 2000; Ask Jeeves, down to 1 from 34 on September 1, 2000; and Yahoo, down to 12 from 139 on August 25, 2000. Sixty-eight other tech companies adopted such plans in the first half of 2001.

THE WORST MESSAGE?

“Tech companies have not been an area in which there’s been a lot of hostile takeover activity,” says David Berger, a partner at the law firm of Wilson Sonsini Goodrich and Rosati, in Palo Alto, California. “But that’s going to change in the next year or so. There’s been an increasing interest in the tech sector by financial players. They’re being much more aggressive. Smaller dot-coms are trading at discounts to their cash value. These companies want to make sure they have the flexibility to deal with the situation.”

McGurn says that shareholder activists generally hate poison pills, complaining that they are roadblocks to lucrative buyouts. “You could make a strong argument that a takeover is the best thing for these companies,” he says. “If you’re an acquirer and there are five targets, and four have poison pills, which would you go after? Some say [a poison pill] is the worst possible message you could send out.”

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