Poison pills are back in the news. But are they as sinister as the term suggests? Not necessarily if you are a family business.
What exactly are poison pills? Put simply, they are shareholder structures that make it harder for hostile takeovers of businesses. They normally work by using discount share purchase agreements, whereby the existing shareholders are able to buy shares at a cheaper price than outsiders.
Poison pills gained notoriety during the 1980s when they were typically used to defend against the leverage buyout craze of the times.
But they appear to be coming back into fashion and are likely to be used more as the world economy begins to recover and merger and acquisition activity picks up.
Recently, News Corp, the media conglomerate owned by the Murdoch empire, announced that it is to use a poison pill share structure to protect existing, mostly family shareholders from any hostile bidder, when it splits its entertainment and publishing activities next month.
Poison pills, or very similar structures, have also been used by Barnes & Noble, the New York-based bookseller. It used such a structure to protect it against the shareholder activist Ron Burkle. Hermes, the Parisian fashion house, has recently used a protective strategy similar to a poison pill structure to defend the family business against a possible hostile takeover by rival LVMH.
But are these justifiable strategies, or just structures designed to protect the power of nepotistic family business dynasties? To help answer that, or at least to gain some explanation, the other side of the equation needs to be looked at – namely the hostile bidder. Hostile bidders will invariably justify their bid for the target company in terms of delivering better value to all shareholders. They will say that current management isn’t delivering that value and that a breakup, or some other form of corporate restructuring, can obtain greater efficiencies. More value means more profits, so the argument goes.
But is that the case? Of course, approaching such a debate from a binary perspective is fraught with difficulties. Nevertheless, the “delivering greater value” argument is problematic on a number of levels. What is delivering greater value? Is it ensuring the share price goes up after the takeover? No doubt that’s probably what the hostile bidder would say is delivering greater value.
But even using this narrow explanation of delivering value is not without problems. Studies by the big professional services firms like PwC have often shown that mergers and acquisitions rarely deliver greater value for shareholders over a sustained period of time. Profits might go up in the short term, but will often fall off over a longer period of time.
But when a broader definition of delivering greater value is used the hostile bidder is on even shakier ground. Few would argue that hostile takeovers deliver greater value to the employees that work for the target company, nor the community in which the business is based. Most successful hostile takeovers often lead to redundancies and production moves away from the original offices or factories. Nor does it deliver much value for the long-term brand of the target company, which normally suffers as the company moves away from the core culture and identity of the original business.
Of course, the hostile bidder might argue that these issues rarely matter. Communities are for the public sector to worry about and employees are merely cost centres that can be streamlined. What matters, they would argue, are more short-term profits for the acquirer and his or her backers.
That isn’t to say that all hostile bidders and shareholder activists are bad. Shake-ups of corporations through hostile takeovers can sometimes deliver a broader value to society. For example, many would argue that breaking up the Murdoch empire might deliver a better result for society, given the media’s business involvement in the notorious hacking scandal in the UK.
But family businesses that believe they are better serving their current shareholders, employees and community should resist them. That is where the poison pill is indeed anything but poison for the family business.