Poison Put - Explained
What is a Poison Put?
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Table of ContentsWhat is a Poison Put?How Does a Poison Put Work?Example of a Poison Put
What is a Poison Put?
A poison put is a defensive strategy deployed by a company to prevent a takeover. The target company offers bonds to investors, these bonds can be redeemed before its maturity date. This is done so as to make the company expensive or difficult to take over by other companies. Its focus is to raise the costs a company will incur as a result of taking over the company. This will dissuade the acquiring company from doing so.
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How Does a Poison Put Work?
To prevent a company from sudden takeover, the executives or managers have to deploy the poison put strategy by making such company expensive thereby rendering the takeover impossible. This takeover defense is legal and one of the numerous strategies deployed to defend a company. Bondholders are given early repayment rights in the case of any takeover in this strategy. Poison put is a type of poison pill defense that provides early repayment as a backup plan, though written in bond agreement but triggered by the takeover attempt. A poison put strategy is different from other poison pill defenses in that it does not directly affect the shareholders but ensures that the acquiring company has enough cash to fund immediate repayment of bonds, in summary, must be able to cover the cost of acquiring a controlling interest in the target company with other acquisition costs. The strategy shifts bond obligations from the future to the present and which any acquiring company must be able to adhere to.
Example of a Poison Put
For example, a company foresees a competitor acquiring it in the future. To defend against this takeover, the company raised money through a bond issuance with the value of the bond estimated to be $50 million. For this acquisition to occur, the acquiring competitor must be able to fund the purchase of a controlling interest of shares and also a repayment of $50 million to bondholders. If the acquiring company can afford this, then the acquisition will be successful.