Companies rush to swallow poison pills to thwart hostile offers as stock prices plunge
The fallen poison pills are resurrected as companies whose stock valuations have rushed to bolster their defenses against takeovers and thwart hostile bids.
These shareholder rights plans allow existing shareholders to purchase preferred shares at a substantial discount, thereby diluting a buyer’s stake and making a takeover more expensive.
In March alone, 57 state-owned companies adopted poison pills in response to an activist threat or as a preventive measure – the highest number of new adoptions in such a short time in more than 20 years, according to the law firm by Chicago Sidley Austin.
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These include household names in a range of industries including Occidental OXY,
Groupon GRPN,
Barnes & Noble BNED,
Hilton Grand Vacations and Spirit Airlines SAVE,
“The large volume of funds accumulated in recent years by private equity firms and hedge fund investors, who have struggled in recent years to find attractive targets, further increases the likelihood of a wave of potential acquisitions. which exploits the recent decline in the business market. evaluations, ”noted the authors of a recently released report by executive compensation consultancy Veritas.
However, private equity groups tend to shy away from hostile bids, which means companies are unlikely to adopt shareholder rights plans to fend off takeover companies.
“For reputational reasons, private equity funds almost never issue hostile takeover bids despite objections from the board of directors and management of a target company,” said Kai Liekefett, co -Responsible for Sidley Austin’s shareholder activism practice. “In fact, the governing documents of many private equity funds outright prohibit any hostile activity. “
Until recently, the number of active poison pills among US companies was extremely low. Popular during the merger waves of the late 1980s and 1990s, the device has fallen out of favor over the past two decades, in large part due to the influence of proxy advisers. At the end of 2019, only 25 companies in the S&P 500 had an active positive pill, note the authors of the Veritas report.
Most poison pills that have been adopted recently last for a year, according to Sidley’s Liekefett. He expects most companies to keep them in place until they expire, he said.
“While the stock market may have weathered the extreme volatility we saw in the spring and market prices have recovered remarkably, there remains a real risk of a second wave of COVID-19 and further disruption. economic – as well as another stock market crash, “he added.
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The defense mechanism has come under heavy criticism from shareholders who claim they can protect directors who attempt to remain independent for reasons that investors do not necessarily share.
Even Institutional Shareholder Services, which advises investors on how to vote on corporate matters, relaxed its stance on poison pills amid the coronavirus crisis. In update guidelines on April 8, she argued that, as long as they have been in place for less than a year and are justified by a sharp drop in a company’s share price, poison pills should be tried on a case-by-case basis. case.
The resurgence of poison pills is due to the sharp decline in stock prices, especially among companies in sectors that have been hit hard by government lockdowns, which have led to the collapse in sales and revenues.
These include companies in the retail, airline, leisure and tourism, and manufacturing sectors. The Veritas study found that the stock prices of companies in these highly exposed sectors have risen dramatically following the adoption of poison pills.
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On average, companies saw their stock prices rise 5% during the day and 12.8% after 10 days. In contrast, the least vulnerable companies, especially those in the defense, chemicals and pharmaceuticals sectors, suffered a negative stock price effect after adopting poison pills.
“This suggests that the circumstances of the adoption and the consequences depend on the extent to which companies have been affected by the crisis,” noted the authors of the report.
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Online offerings retailer Groupon adopted a shareholder rights plan on April 13 after its three-month share price fell 66% to defend against any takeover bid for the company. Three days later, its stock was up 4.94% and on April 17, 8.62%, according to FactSet data.
Three days later, the board of directors of Hilton Grand Vacations HGV,
declared that it has adopted a one-year shareholder rights plan to block a potential takeover of the company following a massive sale of its shares. “The Board of Directors noted that at the close of business on April 1, 2020, the price of the company’s common shares had fallen by more than 50% since the close of markets on January 31, 2019, due to the pandemic of COVID-19. and related market volatility. Heavyweight stocks jumped 10.1% on April 17, according to FactSet.
“As stock prices fell sharply in March, many companies were quick to put poison pills or put them on the proverbial ‘shelf’,” said Frank Aquila, global head of mergers and acquisitions at the firm. New York-based attorneys Sullivan & Cromwell.
“These poison pills were clearly aimed at preventing activist shareholders from acquiring large positions in stocks amid the volatility of the market. While these poison pills can also inhibit opportunistic hostile offers, they will not prevent full-cost takeover proposals from succeeding. As always, it will all be a matter of negotiation, ”added Aquila.