What is a poison pill? How can a poison pill help or hurt shareholders of a publicly held company?

Answer 1

A poison pill is anti-takeover measure that can be adopted by a company's directors without shareholder consent. A poison pill typically provides that if a bidder, without the board's approval, acquires more than a specified percentage of the company's common stock (usually 15% or 20%), then all shareholders of the company other than such bidder will be allowed to buy a very large number of shares of the company's common stock at a heavily discounted price if the bidder buys more shares or tries to effect a merger with company. As a result, the bidder's stock position would be so diluted that it would not be worthwhile to proceed with the acquisition.
The empirical evidence on the practical impact of poison pills is mixed. If a takeover bid is made, a poison pill tends to lead to increases in the bid because the pill forces the bidder to negotiate with the directors for approval to redeem or waive the pill. As part of, or in lieu of, these negotiations, the directors may also decide to hold an auction to obtain the highest bid for the company. On the other hand, the adoption of a poison pill by a company's directors tends to have a negative effect on the company's stock price because a pill tends to deter takeover bids and suppress pricing of initial bids. It is difficult, if not impossible, to determine what bids were not made because of pills; or what bids were made initially at lower prices in the expectation of negotiations about the pill leading to higher prices.