Poison pill: What is a poison pill?
A poison pill is a defense strategy that is used by the target company to prevent or deter potential malicious acquisitions by the acquiring company. Potentially targeted companies use this trick to make the potential buyer look less attractive. As the name suggests, a poison pill is something that is very difficult to swallow or accept. While this is not always the first or best way to protect a company, poison pills are generally effective.
The poison pill gives existing shareholders the right to purchase additional shares at a discount, effectively reducing the ownership interest of the new enemy party.
Understanding the poison pill
Takeovers are very common in the business world, where one company offers to take control of another. When large companies want to enter a new market, they want to get smaller companies, where they can combine the two components to make an operating profit, or when the acquiring company wants to end competition. However, takeovers are not always in good faith and become hostile when the target company does not feel good about it and does not want to acquire. The idea for the poison pill dates back to the 1930s and was created by the New York-based law firm Vachel, Lipton, Rosen and Katz. The name of the poison pill has come from an attempt not to be questioned by the enemy if caught by spies in the past. It was designed to prevent the acquiring company from buying a majority of the shares in potential objectives, or to negotiate directly with shareholders when acquisitions occur more frequently.
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