How a poison pill plan can improve a personal investor’s portfolio

posion pillIn the event that company should begin implementing active defense mechanisms to fend off a hostile takeover attempt (such as a poison pill plan), investors are placed in the middle of a fairly ugly situation.

Between the dilution impacts, declining share prices, and reduced fundamental integrity of the target company’s balance sheet that results from a poison pill package, investors might immediately feel as though they are better off to see their position at an immediate loss, before things escalate, and take their money elsewhere. However, if a personal investor already holds shares in a target company, they can sometimes benefit by taking a moment to evaluate the options that management is presenting to them as a means of actually improving the integrity of the investment within their overall portfolio.

When receiving a rights-issuance package (ie. poison pill package) investors have a couple of different options available to them. Even though the value of the actual shares that the investor holds will immediately decline as a result of dilution, the investor can take advantage of the rights issuance to realize a benefit from the decline. Firstly, the loss on the shares can be used to offset gains realized this year from other positions in the investment portfolio, meaning that the company has immediately issued a tax advantage. From there, the investor can also let the rights issued to them expire to incur additional tax losses for the year.

poison pill planThis latter situation is particularly useful in the event that the markets over-react to a rights issuance, causing the share price to decline even below what the discounted options would allow the shareholder to purchase at. As such, an investor has an immediate benefit to realize from the issuance of a poison pill package, so long as they can offset the losses against gains over the next few years. Otherwise, the investor needs to look at either exercising the rights, or selling them on the open markets.

In the event that an investor doesn’t have the option to write off their shareholder rights, they still maintain the ability to both exercise their rights to purchase more shares (arguably obtaining new shares for free) or to sell the shares on the open market. The important decision to make here is to decide whether to exercise the rights, or to simply sell them off. In the first scenario, and investor is making a discounted purchase for additional shares, and is essentially investing in the ability of the company to make more revenues independently than they would under the merger.

Furthermore, this also likely assumes that the company is able to earn enough of an income to bring the company’s Earnings Per Share metric back to what it was before the dilution occurred (not likely unless the company has a big project that’s about to launch). The end result is that the investor is increasing the amount of room that this company’s shares will take up of their personal portfolio, and therefore increasing the amount of risk exposure that they have to a company in the middle of a particularly volatile scenario.

Alternatively, the investor can sell the rights to create a ‘liquidity event’ that essentially reduces their overall portfolio exposure to the company. While the company’s share price will decline, and therefore take up a proportionately smaller amount of the investment portfolio, the investor will receive a home-made dividend from the sale of the rights package, and essentially walk away with a net-0 difference. The end result is that they have effectively managed to cash out of a portion of their at-risk position, and can use the proceeds to invest in safer securities until the acquisition-related volatility passes.

From Save Sonic ™ Blog

How a poison pill plan can improve a personal investor’s portfolio

In the event that company should begin implementing active defense mechanisms to fend off a hostile takeover attempt (such as a poison pill plan), investors are placed in the middle of a fairly ugly situation. Between the dilution impacts, declining share prices, and reduced fundamental integrity of the target company’s balance sheet that results from […]

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