A January 2nd report from FactSet Insight offers some thought provoking analysis of the various reasons that U.S. firms chose to adopt poison pills in 2014. The report highlights that 54 companies introduced 57 new poison pill provisions into their by laws in 2014.

According to John Laide, Senior Product manager for FactSet Insight, “An analysis of last year’s U.S. poison pill adoptions reveals that companies continue to primarily adopt them for a specific reason, including in response to unsolicited acquisition offers and activist investors as well as protecting net operating loss (NOL) carryforwards.”

Understanding poison pills

In general terms, a “poison pill” is a strategy used by corporations to discourage hostile takeovers. By adopting  a poison pill, a company is trying to make its stock less attractive to a possible acquirer. There are two basic types of poison pills:

  1. A “flip-in” typically permits existing shareholders (except the acquirer) to buy more shares at a discount — By purchasing more shares cheaply, investors get instant profits and they dilute the shares held by the acquirer. A “flip-in” poison pill makes the takeover attempt more difficult and expensive.
  2. A “flip-over” permits stockholders to purchase the acquirer’s shares at a discounted price after the merger — For example, a flip-over poison pill might give shareholders the right to purchase shares of the acquirer on a three-for-one basis in any future merger.

Breakdown of reasons for 2014 poison pills

poison pills

According to FactSet Insight, the No. 1 reason a firm chose to institute a poison pill provision into their by laws in 2014 was to protect net operating loss (NOL) carryforwards. The second and third place reasons for new poison pills last year were a new activist stake and “routine” matter (those adopted before any publicly disclosed threat had emerged or for the purpose of protecting tax assets), at 26% each. In fourth place, just over 11% of firms reported they chose to include a new poison pill in their by laws to protect against an unsolicited offer. Around 5% of firms said they undertook a poison pill last year in order to safeguard a friendly merger, and 4% of companies said they went for poison pills to protect NOLs and because of an activist investor.