A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills:
1. A "flip-in" allows existing shareholders to buy more shares at a discount.
2. A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.
Taobiz explains Poison Pill
1. By purchasing more shares cheaply , investors get instant profits and, more importantly, they dilute the shares held by the acquirer. This makes the takeover attempt more difficult and more expensive.
2. An example of a flip-over is when shareholders gain the right to purchase the stock of the acquirer on a two-for-one basis in any subsequent merger.