Question

What is a flip-over plan?

Answer 1

The flip-over plan is a poison pill strategy used by companies to help protect themselves from a hostile takeover. With the flip-over strategy, shareholders of the target company have the opportunity to purchase shares of the acquiring company – the company looking to engage in a hostile takeover – at a significantly discounted price. The strategy works as a hostile takeover defense because it threatens to drastically dilute and devalue the stock of the company looking to take over the target.

he Process of the Flip-over Plan

A flip-over poison pill is only an option for a targeted company if:

1. The potential acquiring company has made a takeover bid, and the bid hasn’t been rejected outright.
2. The acquiring company’s bylaws spell out provisions for shareholders within the targeted company to buy their shares at a discounted price in the event of a successful takeover.

The right to buy shares at a substantial discount only takes effect if and when the hostile takeover is successful. At that point, the right of the shareholders of the target company to buy discounted shares of the acquirer is “flipped over” (activated). The right to purchase shares at a discount may apply to either common stock or preferred stock.

The deeply discounted share price of the acquiring company’s stock provides a strong incentive for the target company’s shareholders to exercise their purchase option. The larger the number of individuals who purchase the discounted shares of the acquiring company, and the more discounted shares they buy, the more diluted the acquiring company’s stock becomes. The dilution of the stock also puts downward pressure on the stock price since each share now represents a smaller percentage equity interest in the company.

The negative impact of a flip-over is frequently felt the hardest by the acquiring company’s existing shareholders. They do not have the option to buy the company’s stock at a discounted price. Instead, all they can do is sit and watch the value of their own shareholdings erode.

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