A people pill is a defensive strategy or shark repellent used in the event of a hostile takeover. Generally, the entire target company’s management team (or a significant part thereof) publicly threatens that, in the event of the hostile bid proving successful, the team will collectively resign. The acquiring company is discouraged from completing the takeover, by the target management introducing the possibility that the acquirer will have to put together an entirely new management team. As the famed advertising executive Fairfax Cone once stated
The inventory goes down the elevator every night.
Although referring to the advertising industry, to point is to highlight the significance of key personnel as an asset of the firm and one of the reasons for initiating the takeover in the first place. The name is a play on words similiar to “poison pen” and refers to the well known anti takeover measures the Poison Pill & Poison Put.
This strategy is only effective if only effective under specific circumstances. The management team must be crucial to the future success of the firm. Intricate knowledge of the firm, industry contacts, sales relationships etc. will all act together to increase the importance of management continuity. Should these factors be present, it is more than likely that the acquirer will wish to retain the existing management. The cost of replacing the management team, coupled with the opportunity loss and suffering of the business in the short term may be enough to deter the unwanted buyout approach.
However, this approach can backfire. If management are so entrenched in the business, it may be difficult for them to walk away en masse. If the acquirer is aware of this, they may choose to call the management team’s bluff. Alternatively, the people pill tactic can be used as a negotiating tactic. Generous terms can be arranged for the management team (within legal boundaries of course!) in order for them to stay on at the target firm.
Use of the People Pill
One of the first recorded usages of the people pill in mergers and acquisitions is ascribed to the Borden Corporation. In 1989, the company board of directors of this food firm approved a people pill that Borden could use to demand that an acquiring company pay a fair value for the company’s shares and that it not fire or demote any of Borden’s existing managers. In this instance, the strategy was used a negotiating tactic. This illustrates the difficulty in coining an exact definition of the tactic as the defense can be tailored to suit the needs of the target company in question.
Use as a negotiating tactic will help keep the DCP higher as management are indicating they are interested in discussing a deal. An all out threat of mass resignation however, spells greater risk for the merger arbitrage trader and a wider spread would be required before making an investment.
