Poison pills on the rise globally, especially in France, Canada and Japan
With global markets in turmoil due to credit concerns, it’s an optimal time for some shareholders to build positions at companies in which they invest. The current environment is prime ground for activist investors and hostile bidders seeking governance reform, board seats, sale of assets or even full control of companies. For this reason, the ability to fend off unwanted approaches that can damage long-term value is vital, and many companies are turning to the much-maligned poison pill.
The specifics of a shareholder rights plan, or poison pill, vary from country to country, but essentially a poison pill is an anti-takeover tactic giving management the power to block any unwelcome bids. A poison pill prevents any shareholder, or a group of shareholders, from owning more than a certain percentage of a company. A poison pill allows all shareholders (except the acquirer) to purchase shares at a discount, thereby diluting the value of the acquirer’s shares. Typically, poison pills are triggered when an individual shareholder amasses a 10 percent to 15 percent interest in a stock, although this number varies across jurisdictions.
Despite rising shareholder complaints and several years of campaigning for their removal, the US still has the most poison pills in force followed by Canada, Japan and France. From a US perspective, companies in the technology, mining and pharmaceutical sectors have the highest concentration of rights plans. It is interesting to note that during the second quarter of 2008, 15 pills expired, and over 200 pills are set to expire before the end of the year. Half of all existing poison pills at US companies are set to expire by 2010.
In the US, first-time adoptions are no longer popular with Fortune 500 companies. In fact, they have been declining since 1996 and in 2007 only four Fortune 500 companies renewed existing pills while 28 let their pills expire. This is primarily because of investor opposition and corporate governance issues.
Debate over poison pills’ effectiveness in protecting shareholder value continues. But evidence indicates that they do increase value, at least in the immediate future. Reviewing the one-day performance of companies before and after announcing the adoption of a poison pill between 2003 and 2007, the impact was positive in the short term.
With the popularity of poison pills declining in the US, what is driving the take-up in other markets? Hostile and unsolicited takeovers are up for companies in Europe and Asia, leading to poison pill adoptions, especially in countries with a nationalist bent. In 2007 nearly 80 percent of first-time adoptions were for companies based outside the US.
Recently France passed legislation allowing companies to adopt poison pills. Since then, companies such as alcohol giant Pernod Ricard, industrial group Bouygues and energy company Suez (now GDF Suez) successfully adopted poison pills. French companies such as Veolia Environnement, the world’s largest water company, Technip, an oil and gas technology company, and Essilor, an eyeglasses lens maker, had their poison pill proposals rejected by shareholders.
Investor opposition
Carl Icahn thinks that the poison pill is absurd, and he’s not alone. Many institutional heavyweights such as Fidelity, Capital Research, AllianceBernstein and several others have repeatedly voted against adopting poison pills.
Shareholders who oppose the measure believe that poison pills are not in the best interest of shareholders and only serve to protect management and their jobs. Furthermore, investors are concerned poison pills could obstruct a reasonable offer and dilute the value of their shares. Unlocking value (by selling assets) and garnering a higher premium (in the case of a takeover) have been common demands from activist shareholders who would like to instill change.
Recent cases and success stories
Although regulations vary extensively by country in Europe and Asia, two notable cases where poison pills were successfully implemented and utilized against hostile bids include Eiffage in France and Bull-Dog Sauce in Japan.
In France, Eiffage, a building company, was being targeted by another builder, Spain’s Sacyr Vallehermoso (SV) initially for seats on the board and then ultimately for control of the company. The chairman of SV wanted the two companies to combine and pursue construction projects in both countries and become a ‘cross-border construction leader in Europe.’
To thwart SV, Eiffage called for an extraordinary shareholder vote and encouraged shareholders to approve a poison pill. SV, which owned around 33 percent of Eiffage’s shares, convinced other minority investors to support its cause. Eiffage effectively barred SV and its supporters from voting and successfully adopted the poison pill. French regulators became involved, ruling that if SV wanted Eiffage, it would have to offer a higher bid, which at the time would have been double Eiffage’s valuation, a notion SV did not support. SV ended up selling its entire interest.
For Bull-Dog Sauce, a condiment maker based in Japan, the company adopted a poison pill measure after Steel Partners, a US-based activist hedge fund, acquired a 10 percent stake in the company. Bull-Dog issued three equity warrants for each common share for all shareholders except Steel Partners. Thus, Steel Partners’ stake was diluted to 3 percent. It’s interesting to note that more than 80 percent of shareholders voted in favor of the pill indicating that nationalism is a key factor for many shareholders outside the US.
