Gemstar Wields ‘80s Weapon: Poison Pill Takeover Defense
When Gemstar International Group adopted a “poison pill” defense this week in its takeover battle against United Video Satellite Group, it seemed to rip a page from the merger playbook of the 1980s.
Poison pills were a central--if fiercely controversial--element of the decade’s many takeover dramas. But as Gemstar illustrates, poison pills have not only reemerged in the 1990s, they may be more popular than ever despite the generally amicable tone that most deals take these days.
“Poison pills are virtually ubiquitous,” said Jeffrey Gordon, a Columbia University law professor.
Known formally as shareholder rights plans, poison pills are elaborate defense mechanisms that companies erect to fend off unwanted takeover offers. They take several forms, but their basic goal is to knock out hostile bids by making the deals prohibitively expensive for would-be acquirers.
Poison pills were widely criticized amid the debt-fueled merger frenzy of the 1980s. Instead of letting shareholders decide for themselves whether to sell a company, critics said, poison pills let weak managements hang on to their jobs by giving them the ability to dismiss legitimate offers.
Supporters counter that poison pills are good for shareholders because they let companies reject lowball bids. They give companies breathing room to remain independent, force higher offers from their suitors or seek out better deals from other companies, they say.
“Poison pills are like any other type of weapon,” said Jonathan Macey, a Cornell University law professor. “It depends on how they’re used.”
The debate today still centers on how much influence investors should have in the adoption of poison pills, but the tone has shifted slightly from a decade ago. Given their widespread use, the dialogue now focuses less on whether they should exist and more on how they should be structured.
“Shareholders should have significant input into the board’s adoption of a rights plan,” said Patrick McGurn, director of corporate programs at Institutional Shareholder Services, a Bethesda, Md., firm that monitors shareholder issues for large investors.
Individual shareholders have little say in this debate. If powerful institutional investors--mostly pension and mutual funds--have had limited success at best in swaying managements, the only real option unhappy small investors have is to sell the stocks.
Poison pills have made a comeback in the last few years because merger activity has boomed in that time following a lull in the early 1990s.
Last year, 537 poison pills were either adopted for the first time or were renewed by companies whose existing plans had expired, according to Securities Data Co. That’s 49% higher than the 1980s peak of 360 in 1989.
The renewals are occurring because most poison pills have 10-year life spans. However, figures also show that a large number of companies are adopting them for the first time.
Institutional Shareholder Services calculates that 202 poison pills were adopted in the first six months of this year. Of those, 147, or 73%, were first-time plans.
Also contributing to their popularity is the fact that poison pills have become increasingly sophisticated and less vulnerable to attack, experts say. The defenses still can be knocked out by determined suitors with deep pockets or by vocal outcries from big investors. But in their absence, many poison pills succeed in warding off predators, experts say.
The process of adopting poison pills has matured to the point that most now can be put into place within a day or two of an unfriendly offer, experts say.
Poison pills often work like this: When a shareholder or rival company acquires a large stake in a business, often 15%, the target can then flood the market with shares. That makes it extremely costly for acquirers to buy enough shares to gain control.
Gemstar’s plan, for example, holds that if a single party accumulates more than 15% of its stock, all other Gemstar shareholders can double the number of shares they own by buying new stock at a penny per share. Gemstar also boosted the stake that an outsider must buy in order to take control, to 66.7% from 51%.
The persistent problem with most poison pills, critics say, is that companies enact them without seeking the approval of shareholders.
“Institutional shareholders don’t like poison pills and so managements don’t put them up for votes, because they think they’ll lose,” Macey said.
Gemstar enacted its plan without a vote, but did so “to protect the best interests of all shareholders,” said Adam Weiner, a company spokesman.
Pasadena-based Gemstar is the creator of VCR Plus and other interactive TV services. Last week, Tulsa, Okla.-based United Video made public its unsolicited bid of $2.8 billion, or $45 a share, for Gemstar.
In a news release Sunday announcing the poison pill, Gemstar said the company is not for sale.
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Rx Redux
The so-called poison pill, used to thwart takeovers in the 1980s, has made a comeback in recent years. The number of companies adopting new poison pills or renewing expiring ones each year:
1998: 266*
*through July 9
Source: Securities Data
