Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionVIII. Topics in Corporate
Finance- Mergers and
Acquisitions
(^884) © The McGraw−Hill
Companies, 2002
to establish an employee stock ownership plan to be funded with 5.3 million shares
of Ashland stock.
The result of these actions was to eliminate a takeover threat and to make Ashland in-
vulnerable to future unfriendly takeover attempts. Earlier, Ashland had put in place a
provision that said that 80 percent of the stockholders would have to approve a takeover
(a supermajority provision). The shares of stock placed in the employee stock ownership
plan are effectively controlled by management and total more than 20 percent of the
shares, so no one can get the needed 80 percent approval without management’s help.
Exclusionary Self-Tenders
An exclusionary self-tenderis the opposite of a targeted repurchase. Here the firm makes
a tender offer for a given amount of its own stock while excludingtargeted stockholders.
In one of the most celebrated cases in merger history, Unocal, a large integrated oil
firm, made a tender offer for 29 percent of its shares while excluding its largest share-
holder, Mesa Partners II (led by T. Boone Pickens). Unocal’s self-tender was for $72 per
share, which was $26 over the prevailing market price. It was designed to defeat Mesa’s
attempted takeover of Unocal by, in effect, transferring wealth from Mesa to Unocal’s
other stockholders.
At present, it appears that an exclusionary self-tender is likely to be viewed as an il-
legal form of discrimination against one group of stockholders.
Poison Pills and Share Rights Plans
Apoison pillis a tactic designed to repel would-be suitors. The term comes from the
world of espionage. Agents are supposed to bite a pill of cyanide rather than permit cap-
ture. Presumably, this prevents enemy interrogators from learning important secrets.
In the equally colorful world of corporate finance, a poison pill is a financial device
designed to make it impossible for a firm to be acquired without management’s con-
sent—unless the buyer is willing to commit financial suicide.
In recent years, a majority of the largest firms in the United States have adopted poi-
son pill provisions of one form or another, often calling them share rights plans(SRPs)
or something similar. Figure 25.1 contains the body of a letter mailed by Contel Corpo-
ration (a large telecommunications firm) in late 1988 to its stockholders announcing its
adoption of such a plan and sketching some of the features.^8
SRPs differ quite a bit in detail from company to company; we will describe a kind
of generic approach here. In general, when a company adopts an SRP, it distributes share
rights to its existing stockholders.^9 These rights allow shareholders to buy shares of
stock (or preferred stock) at some fixed price.
The rights issued with an SRP have a number of unusual features. First, the exercise,
or subscription, price on the right is usually set high enough so that the rights are well
out of the money, meaning that the purchase price is much higher than the current stock
price. The rights will often be good for 10 years, and the purchase, or exercise, price is
usually a reasonable estimate of what the stock will be worth at the end of that time.
In addition, unlike ordinary stock rights, these rights can’t be exercised immediately,
and they can’t be bought and sold separately from the stock. Also, they can essentially
860 PART EIGHT Topics in Corporate Finance
(^8) Contel’s SRP appears to have achieved its purpose. In the summer of 1990, Contel management agreed to a
friendly merger with GTE Corporation.
(^9) We discussed ordinary share rights in Chapter 16.
poison pill
A financial device
designed to make
unfriendly takeover
attempts unappealing, if
not impossible.
share rights plans
Provisions allowing
existing stockholders to
purchase stock at some
fixed price should an
outside takeover bid
come up, discouraging
hostile takeover
attempts.