Research Spotlight
Poison Pill M&A Premiums
New York - August 30, 2005 John Laide

In its proxy statement for its April 2005 annual stockholders meeting, Dow component Caterpillar Inc. included an explanation on why its stockholders should vote against a proposal requesting the company terminate its poison pill. The company's argument highlighted the benefits to maintaining a poison pill, including the economic benefits to stockholders that a poison pill can provide. Specifically, the company cited studies by Georgeson Shareholder Communications Inc. and JP Morgan & Co. that found that companies with poison pills have historically received higher takeover premiums when acquired than companies without. Referencing these studies, as well as a 2004 study by Institutional Shareholder Services Inc. and Georgia State University that found that strong takeover defenses were correlated with higher shareholder returns, has become standard operating procedure for any company recommending a vote against an anti-poison pill resolution. Both Georgeson and JP Morgan repeated the poison pill M&A premium analyses, upholding the original conclusions that the poison pill group on average has received higher takeover premiums.

In March 1988, Georgeson released the first study comparing merger premiums and poison pill adoptions. The study found that targets of completed takeovers that had a poison pill in place received final offers 78.5% above where their stock was trading six months before the takeover began versus only a 56.7% gain for companies that did not have a poison pill. The study was immediately challenged by the United Shareholders Association (a shareholder rights advocacy group founded by T. Boone Pickens that disbanded in 1993) who asked leading economists to evaluate the study. The group of experts, which included Michael Ryngaert and Gregg Jarrell, found that the study was flawed and misleading in part because it failed to address the decline in share value when companies use poison pills to defeat premium bids, it failed to address the effects poison pill adoptions have on stock prices, and that the six month time frame for which the premium was measured was too long. Ryngaert and Jarrell had completed their own study for the SEC in 1986 that concluded poison pills "are not in the best interests of shareholders". Their study found on average that the adoption of a poison pill reduced a company's stock price by 1.7% over a two day period net of overall changes in stock market prices and that 45% of the companies that adopted a poison pill in their study were able to defeat takeover offers that resulted in the decline of the company's stock price an average of 17% within six months of the defeated takeover. This criticism prompted Georgeson to produce a second study in December 1988 that addressed some of the critics' concerns, but the second study's methodology was also questioned.

Georgeson updated the study in November 1997 by reviewing takeover premiums for transactions completed between 1992 and 1996. The updated study found that companies with poison pills received on average premiums 8% higher than companies without poison pills. The findings were consistent with similar studies done by JP Morgan in 1995 and in August 1997. JP Morgan's 1997 analysis examined transactions over $500 million for the 1993 to mid-1997 period and found that companies with poison pills received a median premium 9.4% higher than companies without. JP Morgan's 1995 study covering the 1988 to mid-1995 period found that companies with poison pills received a median premium 16% higher.

We examined all transactions for at least a majority of a company's outstanding stock completed between January 1, 2002 and June 30, 2005 to determine if companies with poison pills still commanded higher takeover premiums. To be included in the poison pill group, a company must have adopted its poison pill at least 6 months prior to the announcement date of the takeover. Based upon data from FactSet MergerStat, companies with poison pills received a 1-day premium 9.8% higher than companies without (1-day premium compares the final offer price against the stock price one day before announcement), a 5-day premium 10.2% higher, and a 30-day premium 7.9% higher. For transactions over $250 million (the transaction size used in Georgeson's 1997 study), the pill group received a 1-day premium 5.77% higher, a 5-day premium 5.85% higher, and a 30-day premium 8.3% higher. For transactions over $500 million (the transaction size used in the JP Morgan studies), the pill group received a 1-day premium 6.1% higher, a 5-day premium 5.48% higher, and a 30-day premium 7.95% higher.

M&A Premium Analysis
Transaction Set Poison Pill In Force No Poison Pill
All 53.77% 43.53%
>$250 million 30.21% 24.34%
>$500 million 29.51% 24.02%

Methodology
We included all transactions completed between January 1, 2002 and June 30, 2005 for U.S. based companies where the acquiring company was seeking to acquire at least a majority of the target company. We excluded transactions where the acquiring company held a majority of the target company and was seeking to acquire the remaining interest. Premium data is based upon the final offer price the target received. We excluded transactions where premium information was unavailable and transactions where the premium exceeded 1,000%. The poison pill group includes target companies that had a poison pill in force 6 months prior to and on the announcement date of the transaction. Source for poison pill data is SharkRepellent.net.



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