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Author: solasis Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 297  
Subject: Poison Pill Puzzle Date: 2/19/2002 12:35 PM
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In this real world example, a business is faced with a hostile takeover bid for the company, and the board of directors must decide among the following four courses of action:

1. enact a poison pill plan to entrench management and fend off the hostile bid,
2. work with one of the major shareholders to seek another more friendly buyer for the business (a white knight),
3. pursue a going private (management buyout, or MBO) led by the former CEO, or
4. they can accept the unfriendly raider's offer.

There are five directors on the board,

the current CEO, who wants to keep his job and keep control of the company
a former CEO, who is adamant that the raider is rejected and is trying to lead a MBO
a large stockholder, who is also strongly against the raider and would like to pursue a white knight option, and
two outside directors who are in league with the raider.

Their preferences for each of the four options are listed below:

Current CEO - Poison Pill, MBO, White Knight, Hostile Bid
Former CEO - MBO, Poison Pill, White Knight, Hostile Bid
Large Stockholder - White Knight, MBO, Poison Pill, Hostile Bid
2 Outside Directors - Hostile Bid, White Knight, MBO, Poison Pill

The board votes with a secret ballot and finds that no option wins a majority of the initial vote.

Next, the board votes to try to determine which of the three buyout options, the hostile bid, the management led buyout, or the large stockholder led white knight buyout is most preferable. Again, none of the three buyout options gets a clear majority of votes and the board is deadlocked.

The board then agrees that they will first decide on the two alternative buyout options (White Knight and MBO). A vote will be taken between these two options, with the winner to be compared to the hostile bid option in a second vote in order to determine a "buyer of choice". That "buyer of choice" option will then be compared to the poison pill strategy in a final vote.

It is evident that if the hostile bidder is successful, the current CEO will lose his position. If a White Knight is found, the CEO has a 67% chance of losing his position, and if the poison pill or MBO options are pursued, the CEO will be able to keep his position.

The two outside directors, on the other hand, are interested in making sure that some form of buyout happens.

if the MBO, White Knight, and hostile bids are all similar in value,

Q1: Can the hostile bid succeed?
Q2: Can the poison pill succeed?
Q3: What should the outside directors do to ensure some type of buyout?


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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 170 of 297
Subject: Re: Poison Pill Puzzle Date: 2/19/2002 1:08 PM
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What assumptions can we make about the participants?

Are they all "perfectly rational"?
Do they all know each others' thoughts?

Q1: Can the hostile bid succeed?
I don't think so
Q2: Can the poison pill succeed?
Probably -- I guess the current CEO has to vote for hostile bid as the opponent to the poison pill -- this will force the large stockholder to vote for the poison pill
Q3: What should the outside directors do to ensure some type of buyout?
Initially: MBO vs. White Knight, directors vote for MBO, it wins 4-1
then: MBO vs. Hostile, directors vote for MBO, it wins unanimously
then: MBO vs. poison, directors vote for MBO, it wins 4-1

The catch is: You can ensure a better position for yourself by voting against your opinion in the early rounds.

Kind of like "Weakest Link" -- get rid of the people who are the most threat to your winning money.

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Author: TWA40 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 171 of 297
Subject: Re: Poison Pill Puzzle Date: 2/19/2002 1:31 PM
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Current CEO - Poison Pill, MBO, White Knight, Hostile Bid
Former CEO - MBO, Poison Pill, White Knight, Hostile Bid
Large Stockholder - White Knight, MBO, Poison Pill, Hostile Bid
2 Outside Directors - Hostile Bid, White Knight, MBO, Poison Pill

Q1: Can the hostile bid succeed?


Not with the first 3 board members ranking it last of the 4 options. To succeed, the raiders have to convince the large shareholder to change his preferences (i.e. up the bid), or buy out management.

Q2: Can the poison pill succeed?

Only by surviving until the final vote versus the hostile bid. Voting White Knight against MBO would eliminate MBO, but the second round of White Knight vs. hostile bid favors White Knight. White Knight would have to be pitted against all remaining options to be deleted in round 2.

Q3: What should the outside directors do to ensure some type of buyout?

First vote on the Poison Pill versus any type of buyout. Four voters prefer MBO to the Poison Pill, and 3 prefer the White Knight option.

It's clear though that he who controls the proxy machinery and/or the voting process in board meetings has the deck somewhat stacked in their favor.



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Author: solasis Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 172 of 297
Subject: Re: Poison Pill Puzzle Date: 2/20/2002 1:46 PM
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this is a real world example that i was involved in. the actual company was private, and the two agitated board members were young and trying to wrest control or at a minimum create a change in control from the two older gentlemen (ceo and former ceo). they solicited a hostile bid for the company to stir things up, but couldn't get the fifth board member to go along. so they resigned themselves to pushing for another buyout party (white knight - my company) or resignation. however, for political reasons, and lacking foresight, they felt compelled to push for the hostile bid in the early votes. the ceo distorted his preference to kill off our bid, and bring the final vote to a choice of the poison pill vs. the hostile bid. the poison pill won. the agitators were outsmarted.

so the disgruntled board members wound up with a poison pill that temporarily impaired shareholder value, and then they promptly got fired, so they were worse off in the end than if they had just resigned in the first place (the company had a binding stockholder's agreement to pay out departing shareholders at net book value).

tr


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