What is the effect of a poison pill in the context of a hostile takeover?

What is the effect of a poison pill in the context of a hostile takeover?

• A. It encourages more investors
• B. It restricts the buyer’s ability to purchase shares
• C. It makes the takeover more expensive
• D. It increases the shareholder votes needed

Answer: (C)

In the context of a hostile takeover, a poison pill is a defensive strategy employed by a target company to deter potential acquirers. The mechanism typically involved in a poison pill allows existing shareholders (except for the acquirer) to purchase additional shares at a discount, which can significantly dilute the ownership interest of the would-be acquirer. This dilution makes it substantially more costly for the acquiring party to gain a controlling stake in the company, as they would need to buy a larger number of shares at a higher aggregate price to overcome the dilution effects caused by the poison pill provision. Consequently, the poison pill effectively increases the financial burden on the acquirer, thereby making the takeover not only more complicated but also more expensive. The other potential options mentioned do not accurately capture the primary objective of a poison pill, which is to create economic barriers to acquisition while maintaining control and shareholder value.

In the context of a hostile takeover, a poison pill is a defensive strategy employed by a target company to deter potential acquirers. The mechanism typically involved in a poison pill allows existing shareholders (except for the acquirer) to purchase additional shares at a discount, which can significantly dilute the ownership interest of the would-be acquirer.

This dilution makes it substantially more costly for the acquiring party to gain a controlling stake in the company, as they would need to buy a larger number of shares at a higher aggregate price to overcome the dilution effects caused by the poison pill provision. Consequently, the poison pill effectively increases the financial burden on the acquirer, thereby making the takeover not only more complicated but also more expensive.

The other potential options mentioned do not accurately capture the primary objective of a poison pill, which is to create economic barriers to acquisition while maintaining control and shareholder value.