Bad Medicine: The Problem with Poison Pills

The board of Nordstrom recently adopted a poison pill after El Puerto de Liverpool, a Mexico-based retailer, built a 9.9% stake in the US department-store chain. While Nordstrom claims the measure “is not intended to deter offers that are fair and otherwise in the best interests of all Nordstrom shareholders,”1  Dimensional’s research shows shareholders have good reason to be wary of poison pills and similar anti-takeover provisions.

Market volatility can lead to an uptick in hostile takeover bids. Fearing falling public valuations, companies may adopt shareholder-rights plans, so-called poison pills, to force would-be acquirers to negotiate directly with the company’s board, rather than leaving the acquirer the option open to purchase shares directly from shareholders through a tender offer. Typically, poison pills allow shareholders other than the would-be acquirer the right to buy discounted shares. Shares sold at a discount effectively dilute the position of the potential acquirer and make a hostile takeover more expensive. 

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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.