What Is a Poison Put?
A poison put is a takeover defense strategy in which the target company issues a bond that investors can redeem before its maturity date. A poison put is a type of poison pill provision designed to increase the cost a company will incur in order to acquire a target company.
- A poison put is a type of takeover defense strategy designed to make it more expensive for an acquiring company to gain control of a target company during a hostile takeover bid.
- The poison put strategy requires executives of the target company to issue a bond with a poison put covenant.
- The poison put covenant stipulates that bondholders can redeem their bond before the maturity date and receive full payment in the event there is a takeover of the company.
- The poison put is an added expense the acquiring company must pay if it wishes to acquire the target company.
How a Poison Put Works
Executives can employ a number of different strategies when defending their company from a hostile takeover bid. Poison pills are one such strategy and are designed to make the prospect of acquiring a company through a takeover bid expensive and less likely to occur. This type of takeover defense is legal, though company executives still have a duty to act in the best interest of shareholders.
Poison puts are a type of poison pill defense in which bondholders are provided with the option of obtaining repayment in the event that a hostile takeover occurs before the bond’s maturity date. The right of early repayment is written in the bond’s covenant, with the takeover representing the trigger event.
Benefits of a Poison Put
During a hostile takeover, an acquiring entity—usually a rival company or an activist investor—attempts to take control of a publicly traded company without the approval of the company's board of directors. The board has certain strategies at their disposal they can enact to thwart the would-be acquirer.
The poison put can be an effective strategy for the target company because it means the acquirer will have to spend more money in their effort to take control of the company. Thus, companies looking to complete a hostile takeover must balance the cost of acquiring a controlling interest in the target company with other acquisition costs.
A poison put is different than other poison pill defenses in that it does not affect the number of shares in the market, the price of shares, or the voting rights afforded to shareholders. It instead directly impacts the amount of cash that an acquired company has on hand by shifting bond obligations from the future to the date at which the hostile takeover occurs. The acquiring company has to be sure that it has sufficient cash to cover the immediate repayment of bonds.
A poison put strategy may not work for a target company that already has significant amounts of debt, as this strategy increases the company's debt load and could lead to insolvency.
Example of a Poison Put
A company's board of directors believes that a larger competitor may attempt to acquire it in the future. As a defense, the company incurs new debt by issuing corporate bonds. As part of the newly issued bond, the board includes a poison put covenant, which is a provision that stipulates bondholders can receive early repayment of the debt should a triggering event occur, such as a hostile takeover.
The total value of the bonds is $50 million. For the competitor to successfully acquire the company, it must not only be able to afford the purchase of a controlling interest of shares but also afford a potential immediate repayment of $50 million to bondholders. If the acquirer does not have the money to pay this additional acquisition cost, they may need to withdraw their hostile takeover attempt, which means the poison put strategy was effective for the target company.