The flip-in strategy is one of the basic types of poison pill strategies that companies use to benefit their shareholders and help defend their company from an unwanted takeover. In the flip-in strategy, the target company – in order to defend itself against a hostile takeover – dilutes the value of its individual stock shares by making more shares available to existing shareholders.
Understanding the Flip-in Strategy Process
The flip-in poison pill process is typically built into a company’s charter or 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 and acquiring companies points of view
The flip-in strategy provides a strong defense against a hostile takeover by diluting the equity value of individual shares. This is a major deterrent to a prospective hostile acquirer, as it means that they will need to buy many 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 may need to obtain a controlling equity interest in the target company. At the very least, it is faced with a much more expensive acquisition cost.
2. From the point of view of existing shareholders of the target company
The flip-in strategy is, in a sense, free money for the target company’s existing shareholders. 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.
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 CFI resources below will be useful: