Poison Pills

The term poison pill is not a medicinal term in this context, but an economical one. It refers to corporate mergers, restructuring and acquisitions. The term’s origin comes from the cyanide pills that spies had on them, so they couldn’t be captured. Hostile takeovers eventually took over the term. When a company that is publicly traded receives unsolicited bids, the board usually begins trying a number of strategies to prevent the take over. These strategies are called poison pills, as they might convince the other company to back off, but it damages their company as well. One in every five mergers is caused by a hostile take over. This trend continues to increase, as companies with a lot of cash are trying to get bigger by taking over other companies, while paying for them less than they are worth.

While poison pills are quite effective, controversy on their effect against the interest of the company’s shareholders caused their use to drop in time.

Speaking generally, a poison pill is any type of strategy, either in politics or in business that will increase the chance of a negative result rather than a positive one. You can consider it a strategic move from a company that is the target of a hostile takeover move. 1982 was the year when it was first invented by Martin Liption, a lawyer from the US. At the time, it took the form of a plan of warrant dividends, and it was successful in defending the company from a hostile bid advanced by Burlington Northern, a railroad company. The term was first used in 1983, one year later.

A law that was passed by the Supreme Court later, put a stop to most of the hostile takeover activity that was so abundant in that time period in the United States.