Poison Put

A takeover defense tactic in which the target company issuing a bond that investors can redeem before the bond's maturity date.

Author: Adin Lykken
Adin Lykken
Adin Lykken
Consulting | Private Equity

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

Reviewed By: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Last Updated:October 26, 2023

What Is A Poison Put?

A takeover defense tactic known as a "poison put" involves the target company issuing a bond that investors can redeem before the bond's maturity date. Its purpose is to raise the price a company will pay to acquire the target company.

A hostile takeover defense tactic makes it more difficult for an acquiring company to take over a target company. Executives of the target company must issue bonds with a poison put covenant as part of the strategy.

The covenant provides that bondholders may redeem their bonds early and receive full payment if they take over the company. However, it is an additional cost the acquiring company must cover to purchase the target company.

Unlike poison pills, which affect shares and voting rights, poison puts have no such effect. Executives can use various tactics when defending their business against a hostile takeover bid. 

One such tactic is "poison pills," which aim to increase costs and decrease the likelihood of acquiring a company through a takeover bid. 

Although company executives are still responsible for acting in the shareholders' best interest, this takeover defense is legal.

A poison pill defense, known as a "poison put," gives bondholders the chance to get their money back if a hostile takeover happens before the bond's maturity date. The takeover is the trigger event for the early repayment right stipulated in the bond covenant.

A target company that anticipates a hostile takeover offer may use new debt to issue bonds to investors as a poison pill defense. 

In the event of a hostile takeover offer, the recently issued bonds contain a clause (covenant) that gives the bondholders the option to receive an early repayment of the debt. This sum can be significant if the interest rate is high, the bond's term is long, or both. 

The strategy's main objective is to make a corporate raider face a heavier financial burden during a hostile takeover attempt.

A potential bidder must carefully evaluate the cost of acquiring a controlling interest in the target company and other related expenses, such as the target's debt payments, and make sure it has enough cash on hand to cover all acquisition costs if the target company uses the poison put defense strategy.

Not every company should use this strategy. For instance, the strategy may worsen the target company's financial situation and result in financial distress if its balance sheet is weak and it already has a sizable amount of outstanding debt.

Example Of Poison Put

Let's start with an example of this strategy:

The tech sector is where PBH Corp., a medium-sized business, operates. The company's management recently learned that MBC Corp., a rival, intends to launch a hostile takeover of their company. 

PBH Corp.'s management alerts the prospective offer's board of directors. As a result, the company's shareholders decided to use the poison-put defensive tactic to reject the takeover offer from MBC Corp.

The management of PBH Corp. is aware that MBC Corp. needs $300 million to acquire a controlling stake in PBH. Therefore, the board decided to issue new debt from $150 million worth of corporate bonds.

If PBH Corp. issues the bonds, a covenant with a put option will guarantee immediate repayment in the event of a takeover. In addition, the bondholders will be qualified for reimbursement at 105 percent of par value if they exercise their early payment option (i.e., 5 percent above par). 

Therefore, the total bond value will rise to $157.5 million.

The total acquisition cost for MBC Corp. will now be $457.5 million ($300 million + $157.5 million) following the implementation of the poison put defense. The high cost may effectively deter MBC from pursuing the takeover.

Now, let's look at another example. The board of directors of a company thinks a bigger rival may try to buy it in the future—the business issues corporate bonds as a form of defense, adding to its debt load. 

The board decided to include a poison put covenant in the recently issued bonds, which states that if a triggering event, like a hostile takeover, bondholders will be entitled to early repayment of their debt.

The bonds have a $50 million market value. Therefore, the competitor must be able to afford the purchase of a controlling interest in the company's shares and the potential immediate repayment of millions in interest to bondholders to acquire it successfully.

The poison-put strategy worked well for the target company. It forced the acquirer to abandon their hostile takeover attempt as they lacked the funds to cover the additional acquisition cost.

Benefits Of Poison Put

An acquiring entity—typically a rival business or an activist investor—attempts to acquire control of a publicly traded company during a hostile takeover without the board of directors' consent. The board is equipped with several tactics that they can use to thwart the prospective acquirer.

Because the acquirer will have to spend more money to gain control of the business, the poison put can be a successful strategy for the target company. 

As a result, businesses considering a hostile takeover must weigh other acquisition costs against the price of acquiring a controlling stake in the target business.

It could put a company in financial trouble if it has significant debt or minor in the way of assets. It differs from other poison pill defenses in that it does not impact the volume of shares traded, their price, or the shareholders' rights to vote. 

Instead, it moves bond obligations from the future to the day of the hostile takeover, directly affecting how much cash an acquired company has.

The acquiring company must have enough cash to cover the immediate bond repayment.

A target company already heavily indebted may not benefit from a poison put strategy because it would add to its debt and put it at risk of going bankrupt.

Alternatives to a Poison Put

The alternatives are:

1. Crown Jewel

The crown jewel defense is when a company sells off its most priceless assets, also referred to as the crown jewels, to appear less desirable to the acquiring company. The assets that generate revenue are a company's crown jewels.

The target company sells its assets to a white knight to implement the crown jewel defense. This third party purchases a company on more benevolent terms than the adversarial black knight

When using this strategy, the white knight typically consents to return the assets to the target business after the hostile takeover has been stopped.

Let's take a closer look at a more effective crown jewel defense tactic where Company Y sells its assets to a reliable third party:

Company X makes a bid to buy Company Y. Company Y declines the offer. However, company X goes ahead with the acquisition anyway, proposing to pay a 10% premium for Company Y's stock. 

To buy Company Y's assets for $100 million, Company Y contacts Company Z, a trusted business. A contract between Company Y and Company Z states that Company Y will repurchase its assets from Company Z at a slight premium after the hostile bidder leaves. 

Company X withdraws its hostile bid because Company Y's most valuable assets are no longer there. Company Y repurchases its assets from Company Z at the predetermined price after the hostile bidder withdraws.

2. Stock Acceleration

Stock acceleration, also referred to as triggered-option vesting is used to fend off hostile bidders by making the company less desirable and more expensive to acquire. It is similar to the poison put option in this regard. 

This strategy requires the acquiring company to pay the employee's unvested stock options when a specific event occurs. The acquisition is what causes the accelerated vesting to happen. Therefore, the vesting schedules remain in place if the sale doesn't appear.

If the acquisition goes through, the business might have trouble keeping talented workers whose continued employment might have relied heavily on their vesting percentage.

Companies may decide to speed up the regular vesting schedule for highly valued employees, which increases the present value for the workers. 

The company may face problems due to the employee benefit, including the possibility that the employee will take the money and leave the organization soon after. For both the employer and the employee, vesting changes have tax ramifications.

3. Pac-Man Defense

When a hostile bidder attempts to acquire a target company, the target company can use the Pac-Man defense

The acquiree becomes the hostile bidder by acquiring most of the acquirer's shares. This puts the acquirer's business and the acquisition at risk.

The Pac-Man strategy allows the target company to hunt down and consume those initially targeting them for consumption, just like its arcade game namesake. 

The target company must have sufficient resources to take over the adversarial company for the strategy to be successful.

Let's look at an example.

Internationally, the Porsche and Volkswagen Group case may be the most well-known. Porsche, led by Wendelin Wiedeking, orchestrated a hostile takeover of the much larger Volkswagen Group. 

It did this by gradually increasing its stake in Volkswagen until Porsche eventually owned over 75% of the company in 2008. Banks were reluctant to lend Porsche any more money during the financial crisis of 2007–2008. They wanted their loans paid back immediately. 

By October 2008, Porsche was experiencing record profitability but suddenly ran out of money.

Ferdinand Pich was the chairman of Volkswagen and a member of Porsche's board of directors. He was also the grandson of Ferdinand Porsche, the company's founder and a co-founder of what would become Volkswagen.

He chose to loan Porsche the money necessary to pay off their debts. This turned Volkswagen—which Porsche had tried to acquire—into the rescue, effectively taking control of Porsche. 

The battle between the Porsche and Pich families (both descendants of Ferdinand Porsche) for control of Porsche and Volkswagen finally ended. 

The historical ties between Porsche and the Volkswagen Group contributed significantly to the peculiar circumstances. Volkswagen was identified as the surviving partner when the two businesses announced their official merger later that year.

Poison Put Frequently Used Terms

Here are some frequently used terms while researching it.

Researched and authored by Tamanna Hassan | LinkedIn

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: