The poison pill, arguably the most effective anti-takeover device, is making a comeback in the wake of the coronavirus (COVID-19) crisis. As the virus spread around the globe and through the United States in late February and early March of 2020, stock prices plummeted and market volatility dramatically increased. As a result of the ongoing crisis, many corporations have found themselves dealing with unprecedented challenges and disruptions. Companies whose operations have stalled, such as airlines and brick-and-mortar retailers, are likely to suffer from cash flow problems, potential defaults, and suppressed revenues. Moreover, intense market volatility means that stock prices may be depressed due to bad news which does not reflect underlying firm fundamentals or the true continuation value of the firm.
The sharp decline in stock prices makes corporations particularly vulnerable to takeovers and interventions by hedge fund activists. The large volume of funds accumulated in recent years by private equity firms and hedge fund investors, which have struggled in recent years to find attractive targets, further increases the likelihood of a potential acquisition wave that exploits the recent decline in firms’ market valuations.
In response to this development, a large number of corporations have moved quickly to adopt poison pills to protect themselves from possible acquisitions, even when there is no known bid for the shares of the firm. Since March 2, 2020, at least 45 firms have announced the adoption of poison pills. These companies include household names in a wide range of industries, including Occidental Petroleum, Groupon, Barnes & Noble, Hilton and Spirit Airlines. Until the emergence of COVID-19, the number of active poison pills in US corporations was extremely low. Although historically popular, particularly in the merger waves of the late 1980s and 1990s, poison pills have fallen out of favor in the last two decades, in large part due to the influence of proxy advisors; at the end of 2019, only 25 S&P 500 public firms had an active positive pill.
Whether poison pills have any impact on shareholder value remains subject to extensive debate. However, as shown in recent work by Catan (2019), firms tend to adopt poison pills following a decline in market valuations. Thus, the recent adoptions of poison pills in the midst of a crisis (although not previously explored) is broadly in line with the historical patterns.
Nonetheless, the COVID-19 pandemic has some features that create a unique opportunity to shed more light on the way poison pills are used and their potential impact. In particular, the crisis has had widely varying effects on different types of companies. Firms that belong to industries with high exposure to the crisis, such as airlines and entertainment, suffered from a sudden negative shock, which could make them more vulnerable to opportunistic takeovers or activist interventions. Consistent with this rationale, even proxy advisors, such as the ISS and Glass Lewis, have indicated recently that they understand the potential justifications for pill adoptions in the wake of the pandemic. On the other hand, other firms may be affected less severely, and some, such as online retailers, may even benefit from the crisis.
To examine the renewed adoption of poison pills, we started documenting their adoptions in real time. Using SDC data and news search, we document 45 firms announcing the adoption of poison pills between March 2 and April 21, 2020. We classify these firms broadly into groups with high and low-to-moderate exposure to the current crisis based on a recent Moody’s report on the pandemic from March 17, 2020 (see Figure 1). We manually classify each firm as belonging to the industries described by Moody’s based on its three-digit SIC code and its business description. These classifications are mostly straightforward with a few exceptions. For example, although Global Eagle Entertainment Inc. is classified as a telecommunication firm based on SIC code, we classify it as a high exposure firm because it primarily provides services to the airline industry.
