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Abstract
In today's world of business, Mergers and Acquisitions poison pills have a strong deterrent effect on takeovers
(M&A) are an indispensable part of corporate strategy. and the bargaining power argument does not provide
However, not all mergers and acquisitions are friendly sufficient economic rationale for shareholders to leave
and the threat of hostile takeovers has led to the the decision to the board. The paper concludes that
development of a wide range of anti-takeover the use of a poison pill without a provision for
defenses. This paper looks at one of the most shareholders review, particularly when combined with
controversial takeover defenses, the 'poison pill'. This an effective staggered board, strongly suggests that
assumes significance in light of the fact that M&As, management entrenchment and shareholder activism
including hostile takeovers, are not merely a North in this direction is a natural consequence. The paper
American phenomena and defensive tactics used in recommends design of takeover defenses that align
this region are spreading to other regions. This paper the interests of both shareholders and management.
examines the merits of various arguments used in
support of the poison pill taking into consideration Key words: Mergers, Acquisitions, Hostile takeovers,
previous research on takeover defenses. It finds that Poison pills.
1. The acquirer cannot negotiate with each and every Given the controversy, a number of researchers have
shareholder, particularly when the shares are studied the impact of poison pills on the shareholders'
widely held. In such cases, individual shareholdings wealth (Comment and Schwert, 1995; Datta and Datta,
are small and the advantage lies with the acquirer. 1996; Malatesta and Walkling, 1988). At the core of the
For example, in a two-tiered offer, the individual controversy is the question whether adoption of
shareholder faces a situation similar to that poison pills is in the interest of shareholders or an
With increase in M&A, the threat of hostile takeovers attribute this to rise of foreign investments and
also increases. Quoting Vishwanathan of RSM Astute changes in Japanese corporate law. The use of the
Consulting, The Economic Times (2012) says that the poison pill by a Japanese company Bulldog Sauce made
threat of hostile takeover has always been present in news when it was challenged in the court (Chen, 2007).
India, but it has gone up with the new takeover code. Kang (2013) argues that managers in other regions of
Hostile takeover attempts in India like Autoriders' the world are likely to lobby for the pill considering its
attempt to take over Saurashtra Cements, Sterlite's effectiveness and the belief that the U.S. sets the
attempt to take over Indal and Pramod Jain's attempt standards for M&A. They quote the example of Japan
to take over Dalmia's Golden Tobacco when seen with and Korea on how this type of argument prevailed.
successful takeovers like that of Raasi Cements by India Gilson (2004) claims that the poison pill can be more
Cements and Zandu Pharma by Emami clearly indicate harmful in Japan than in the United States in the
that the threat of hostile takeovers is real (Das, 1998; absence of institutional infrastructure that has an
Mallinath, 1998; The Economic Times, 2009; Business ameliorating effect and recommends caution in
Standard, 1998; Livemint, 2008). Faced with hostile changing laws to facilitate the use of poison pills as a
takeovers, managers in these regions are likely to defensive measure.
consider the use of takeover defenses like poison pills
to protect themselves. In addition, with globalization Examining the merits of the arguments in
and liberalization, regulators in many regions may be
support of the poison pill:
required to consider modifying existing laws or
Starting with the bargaining power argument, various
introducing laws on the use of poison pills.
arguments in support of the pill are examined in this
section. In addition, the issue central to the
Emerging economies can draw a parallel from Japan.
controversy - the motivation of the board
According to Kato, Fabre, and Westerholm (2009),
/management in adopting poison pills is also
M&A have been on the rise in Japan from 2003 and the
discussed.
use of the poison pill started in 2004. They claim that
the yearly adoption rate for poison pills in Japan has
The Bargaining Power Argument -
accelerated from 2 in 2004 to 372 in 2007. They
The question that is central to the use of the poison pill Every day, some shareholder or the other sells his /her
and probably one that is most difficult to answer is the shares on the stock market. The management has the
motivation of the board/ management. It would be responsibility to manage the firm efficiently and
naïve not to acknowledge the conflicting interests in a ensure that the shares trade at their true value. When
takeover situation. The proponents of the pill claim the firm performs poorly, the management is expected
that ‘shareholder interest’ is the primary motivation to take proactive steps to improve the performance of
whereas opponents of the pill claim that management the firm. Instead, if they adopt defenses that prevent
is motivated by ‘self interest’. It is likely that both the the shareholders from accepting an offer at a premium
motivations are present in a decision to use the pill, but to the market price, it only indicates self-interest.
no management would articulate its self-interest as a Shareholders are therefore sceptical when the
valid reason for resisting the takeover. Research on the management does nothing to improve the poor
characteristics of firms adopting the poison pill and the performance at the bourses, but express concern at
post deal careers of the CEOs provide some insight into the inadequacy of an offer at a substantial premium
these motivations. Several researchers (Bebchuk, over the market price. Yahoo’s resistance to
Cohen and Farrel, 2009; Comment and Schwert, 1995; Microsoft’s offer is an interesting case study. Microsoft
Datta and Datta, 1996; Dahya and Powell, 1998; offered to acquire Yahoo at $33 per share and Yahoo
Malatesta and Walkling, 1988; Strong and Meyers, rejected it as inadequate (Associated Press, 2008). On
1990) have found that many firms adopting poison May 3, 2008, Microsoft finally decided to withdraw.
pills and other takeover defenses perform poorly According to the historical prices available on Yahoo
during the year(s) preceding the adoption of the pill. finance (nd), Yahoo’s share price closed at $25.72 on
They found that these firms perform poorly on the May 5, 2008. On November 30, 2008 the share price
market and also on a number of financial measures. dropped to as low as $ 8.94. On July 29, 2009 its shares
Datta and Datta (1996) found that these firms under- traded at $15.14. The highest monthly share price did
perform compared to their industry cohorts. Given not cross the $33 level from May 2008 to August 2013.
the poor performance, the CEOs of these firms would How does one justify the rejection of Microsoft’s offer
find it difficult to find a job once their company is taken at $33 as being inadequate when share prices did not
over. According to Mallette and Fowler (1992), rise above Microsoft’s offer in the five years following
directors of a target firm are usually dismissed shortly the withdrawal? It is therefore clear that the
after a successful takeover. Hartzell, Ofek, and Yermack management of poorly performing firms is more likely
(2004) found that two-thirds of the CEOs leave their to adopt poison pills to entrench themselves.
firms at the time of the merger and only 36% of the
one-third who remain survives beyond two years after
the deal. According to them, for CEOs who leave, it is
probably the end of their careers. With very low
probability of finding another job, the threat of losing
their jobs is a powerful motivator for opposing
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Dr. D.L.Sunder is a Professor of Strategic Management and Entrepreneurship at IIM Indore. He has over
25 years of Industrial / Teaching experience. He has worked in various organizations like HMT Ltd., Indian
Carburettors Ltd etc., before moving to teaching. He was Director, National Institute of Fashion
Technology, Hyderabad before joining IIM Indore. Dr. Sunder has a number of publications to his credit.
His areas of interest are Strategic Management, Innovation, and Entrepreneurship. He can be reached at
sunder@iimidr.ac.in