Poison Pills on the Decline?

A corporate governance database, FactSetSharkRepellent, has reported that less than 20 percent of the companies in the S&P 500 have poison pill plans in place to slow down takeovers.  Over 60 percent of the companies had such plans in place in 2002.  Moreover, the number of companies with staggered terms for directors has fallen by half in just the last eight years.  Are takeover defenses passe?  No.  Target boards threaten by an unwanted bidder can put poison pill plans in place in a moments notice if need be.  Moreover, the variety of poison pill plans has mulitpied; they can be inserted not only into stock contracts but also into labor, debt and supplier contracts.  The staggered board change is real, however.  A new board can revoke an old poison pill plan.  Without a staggered board, a bidder can seek control of the board in a single proxy solitication contest.  At most this takes a year.  With a staggered board, a bidder must win two contests, often taking two years.   The prospect of the second contest is a significant deterrent to bidders and their financial backers.  The investor market has apparently decided that poison pills backed by staggered boards are too powerful a disincentive to takeovers and that the threat of poison pill plans alone are optimal, giving target boards just enough bargaining power to extract a higher price from a bidder but not enough power to block or deter entirely a wealth enhancing bid.

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