Become a Financial Modeling & Valuation Analyst (FMVA)®. Enroll today to advance your career!
Login to your new FMVA dashboard today!

Flip-In Strategy

An unconventional strategy to defend against takeovers

What is the Flip-in Strategy?

The flip-in strategy is one of the basic types of poison pill strategies that companies use to benefit their shareholders and to help defend their company from an unwanted takeover. In the flip-in strategy, the takeover target company – in order to defend itself against a hostile takeover – dilutes the value of its individual shares by making more shares available to existing shareholders.

 

Flip-in Strategy

 

Understanding the Flip-in Strategy Process

The flip-in poison pill process is typically built into a company’s bylaws. It sets up an automatically triggered response whenever a shareholder acquires a certain percentage of the company’s outstanding shares. At the point which the shareholder acquires the triggering percentage – which is usually a minimum of 20% up to a maximum of 50% – the flip-in strategy is activated.

In addition to the automatic trigger, another reason that a company puts the flip-in poison pill strategy into its bylaws is that they want potential hostile acquirers to know about it. Often, just the knowledge that a flip-in strategy exists is a sufficient deterrent to keep hostile acquirers away.

When the strategy is activated, already existing shareholders – but not newly buying shareholders (i.e., such as the hostile acquirer) – are given the opportunity to buy additional shares of the target company. In addition, the opportunity to purchase additional shares is made very appealing by the fact that the shareholders can acquire them at a substantial discount from the current market price.

Corporate Finance Institute® offers a course that delves into the financial analysis behind acquisitions. Check out our M&A Financial Modeling Course to learn more!

 

What the Flip-in Strategy Does

The flip-in poison pill strategy accomplishes two things:

 

1. From the target company’s point of view

The flip-in strategy provides a strong defense against a hostile takeover by diluting the equity value of individual shares. It is a major deterrent to a prospective hostile acquirer, as it means that they will need to buy more shares in order to acquire a controlling interest in the company.

Because the acquirer has no way of knowing how many additional shares will be added to the market, it can’t even determine how many shares it would now need to obtain a controlling equity interest in the target company.

 

2. From the point of view of existing shareholders of the target company

The flip-in strategy is in a sense, free money. They can buy a number of additional shares at a discount to the market price, and then turn an immediate profit by selling them on the open market at the current market price.

The practice offers the added bonus of potentially increasing shareholder loyalty. While the flip-in strategy may dilute the equity position of existing shareholders, it is not likely to be a major concern for most shareholders who are not interested in owning a certain percentage of the company. In any event, the offer of discounted shares is usually considered more than adequate compensation.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Mergers & Acquisitions Financial Modeling
  • Non-Controlling Interest
  • Poison Put
  • Weighted Average Shares Outstanding

M&A Modeling Course

Learn how to model mergers and acquisitions in CFI’s M&A Modeling Course!

Build an M&A model from scratch the easy way with step-by-step instruction.

This course will teach you how to model synergies, accretion/dilution, pro forma metrics and a complete M&A model. View the course now!