VideoOne reason may be their aggressive terms. Whenever a board adopts a poison pill, it sets a "trigger," a percentage of stock that an acquirer must buy before the poison pill goes into effect. When companies first started adopting pills in the early 1980s, a 20 percent trigger was the rule, says McGurn. Today, triggers are more often set at 15 percent, and 10 percent is increasingly common.
"Boards are putting in pills that are much more toxic," says McGurn. "The last thing a big institutional investor wants is a phone call that says, 'Guess what? You just accidentally stepped over the 10 percent line at company XYZ and triggered their poison pill.' That's a nightmare call for a large institution."
To head off such problems, many companies go to some length to exempt large institutional holders from the trigger. When Coach Inc. adopted its pill this year after majority owner Sara Lee Corp. completed its spin-off, it set a 10 percent threshold. But it allowed Wellington Management Co. and Fidelity Investments, its two biggest institutional holders, to own as much as 15 percent. Still, if their stakes fall below 10 percent, the 10 percent threshold will apply.
WILDLY INFLATED
More critically, some companies are also raising the amount of stock granted under poison-pill provisions by wildly inflating their exercise price. The exercise price of a pill usually reflects a significant premium over the market value of the company's stock, typically three to five times the current price.
Pills also usually give shareholders a 50 percent discount on the purchase price of the stock if the pill is triggered. So, for example, if a pill's exercise price was set at $60 and the stock price on the day the pill was triggered was $30, shareholders could buy $60 worth of shares at the discount and end up with four shares for each one they hold.
One company, Extreme Networks, a broadband network provider, recently adopted a poison pill with an exercise price of $150, which is more than nine times what its price was on August 31. If the company's pill were exercised that day, shareholders would have been entitled to buy nearly 20 shares for each one they held.
"We're seeing a lot of companies rushing in and amending their exercise prices," says McGurn. "They're just clearly saying, 'We don't ever want this pill to be triggered.'"
All of which suggests that at least for some types of companies, a poison pill may be an effective means of playing hard to get only if its terms are relatively moderate. Like so much else in the financial markets, however, the current trend in hostile takeover defenses runs toward the extreme.
Kris Frieswick (krisfrieswick @cfo .com) is a staff writer at CFO.
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