Mergers and Corporate Restructuring
Saks, a big retailer, used poison pills after it faced a difficult situation during the financial crisis. As its performance worsened, the stock price fell down, and the company became attractive for big investors. The stake of Carlos Slim, for example, grew to around 16% and created the threat of possible takeover. In order to defend the company during the period when it faced difficulties, the Board of Directors decided to adopt poison pills strategy, under which investors would be able to acquire shares at a half price if any investor acquired more than 20% of the stocks. Such measures eliminated the possibility of a takeover. However, in a year the company dropped such strategy and limited the ownership to 40%, increasing chances of becoming a subject of a takeover again in the future.
Poison pills are one of the most effective methods of fighting takeovers before their announcement. They make shares unattractive for potential investors and minimize chances of possible takeovers. However, they are detrimental to the image of a company and to satisfaction of its actual shareholders. Consequently, such strategy is usually applied as a last chance of rescue. Companies usually set a specific period for their poison pills strategies. This period indicates time which is necessary for the company to improve its performance and minimize the possibility of acquisition. In case of Saks, the duration of poison pills was too short in order to meet such targets. Though the company entered into a revolving credit agreement, it did not become significantly stronger in terms of financial stability. As a result, the company increased its threat of takeover, which is obviously very negative for it.
However, there are at least two explanations of such decision. First, the Board of Directors could follow the trend of dismantling its antitakeover measure as well as other companies, which are "faced with opposition from activist shareholders and new pressures to clean up governance after corporate scandals" (Sidel 2004). Indeed, using poison pills has a negative impact both on the image of a company and the mood of investors in case of inside Boards. Second, the Board of Investors could violate its fiduciary duty, which includes "duty of care and duty of loyalty" (Betton, Eckbo & Thornburn 2008, p.44). This means that the conflict of interest and abuse of authority resulted in the decision which is not actually positive for the company and its shareholders.
However, there are other explanations. If the Board of Directors considered possible takeover offer to be positive for the company, its drop of poison pills would mean a step toward possible acquisition. Furthermore, Mr. Della Valle's stake could help the company to fend off incursions by Mr. Slim. Finally, it is important to keep in mind that the revolving credit agreement presupposes that it will go into default if any shareholder buys more than 40% of the company. As a result, there are both positive and negative outcomes of the decision, and some additional information may clarify the details.