What is 'Flip-In Poison Pill'

Flip-in poison pill is a type of strategy in which existing shareholders, but not acquiring shareholders, are allowed to purchase shares in the target company at a discount. A flip-in poison pill takeover defense dilutes the value of the shares purchased by the acquiring company by flooding the market with new shares, while also allowing investors who purchase the new shares to profit instantaneously from the difference between the discounted purchase price and the market price.

BREAKING DOWN 'Flip-In Poison Pill'

Flip-in poison pill provisions are often found in a company's bylaws or charter as a public display of their potential use as a takeover defense. This tells any company thinking about a hostile takeover that they will face a lot of difficulties. Companies looking to fight this strategy may try to have a court dissolve any program providing the deep discount, but the chances of success are uncertain.

The rights to purchase occur only before a potential takeover, and when the acquirer surpasses a certain threshold point of obtaining outstanding shares (typically 20 to 50 percent). If the potential acquirer triggers a poison pill by accumulating more than the threshold level of shares, it risks discriminatory dilution in the target company. The threshold establishes a ceiling on the amount of stock any shareholder can accumulate before being required, for practical purposes, to launch a proxy contest.

An example of the flip-in poison pill in action happened in 2004 when PeopleSoft was employed the model against Oracle Corporation's multi-billion hostile takeover bid. At the time, Andrew Bartels, a research analyst for Forrester Research said, "The poison pill is designed to make it more difficult for Oracle to take over the organization. The customer assurance program is designed to compensate customers should there be a takeover. It's a financial liability for Oracle." Oracle attempted to pursue court dissolution of this program, and in December 2004, it succeeded with a final bid of approximately $10.3 billion.

Flip-In vs. Flip-Over Poison Pill

By contrast, a flip-over poison pill is a tactic that gives existing shareholders of the targeted firm the rights to purchase shares of the acquiring company at a discounted price. However, this tactic must be included in the bylaws of the acquiring company. These rights only go into effect when a takeover bid arises. The flip-over poison pill encourages existing shareholders of the targeted company to purchase shares of the acquiring company to dilute its share price.

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