Poison Put

DEFINITION of 'Poison Put'

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.

BREAKING DOWN 'Poison Put'

Executives can employ a number of different strategies when defending a 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 thus 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.

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.

For example, a company believes that a larger competitor may acquire it in the future. As a defense, the company raises money through a bond issuance, and includes a poison put covenant. 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 repayment of $50 million to bondholders.