The precipitous decline in stock prices since August has sent fear into the hearts of many corporate executives and they've turned to poison -- pills, that is. So concerned are they that hostile acquirers will buy them cheaply, that there has been a huge increase in the number of shareholder rights plans -- a.k.a. poison pills -- adopted by corporate America.
From Aug. 1 through Oct. 13, 122 U.S. companies adopted or renewed poison pills, according to a report from Institutional Shareholder Services, Bethesda, Md. Year-to-date as of Oct. 13, a total of 372 companies had put poison pills in place via adoption or renewal. Not surprisingly given the market turmoil in late August, the most pills were put in place in September, when 41 firms adopted new pills. And in the first 13 days of October, two dozen companies adopted first-time rights plans, according to ISS figures.
High-tech and biotech industries, whose stocks soared in the bull market and were particularly hard hit by the market's fall, are participating heavily.
"People in the high-tech industry know some companies won't be able to stay independent," said the report's author, Patrick McGurn, director of corporate programs for ISS. "There are companies that would like to buy them cheaply both for their technology and their people."
NEW THRESHOLDS
The thresholds at which these new pills will be triggered are lower than in the past, according to the ISS report. At many companies these new pills kick in at the 15% threshold -- when an unwanted suitor buys 15% of a company's outstanding stock. Previously, 20% was the most common threshold.
Although the $240 billion Teachers Insurance Annuity Association-College Retirement Equities Fund, New York, is usually an opponent of poison pills, Kenneth West, senior consultant for corporate governance, expressed sympathy for some companies that have recently adopted pills. "I can understand some companies' concern with the precipitous drop in their stock prices," he said. In some cases, "the high-tech stocks have fallen 50% or more. These companies can be fodder for bottom feeders. Having a pill in place gives them time to review an offer. They (executives) don't have to panic out of fear a hostile (acquirer) will get the company at a low price."
"Managers are caught between a rock and a hard place," Mr. West said. "If they put the pill to a vote the institutional shareholders will often vote no, but management is worried about the company (being bought cheaply)."
At Brooktrout Technology Inc., Needham, Mass., which adopted a poison pill in September, CFO Robert Leahy said, "Our stock is undervalued. The stock price doesn't reflect all the new products we have in our R&D pipeline."
The electronic messaging company's stock had a 52-week high price of 221/2, before sinking to a low of 91/2 at the market's nadir. The stock, which trades on the NASDAQ stock exchange, closed at 135/16 on Oct. 23. Brooktrout's pill kicks in at the 15% threshold.
Mr. Leahy also pointed out that Brooktrout management "owns a significant portion of the company (about 15% of the stock outstanding). This is not an issue of management entrenchment."
Leah Berkovits, investor relations officer of Bio-Technology General Corp. Iselin, N.J., which adopted a poison pill in October, said, "We're a profitable company with strong sales. Under these conditions we want to make sure the company doesn't become an easy takeover target. We wanted to protect ourselves."
Bio-Technology stock had a 52-week-high of 145/8 and hit a low of 43/16 when the market nosedived. The NASDAQ-traded stock closed at 613/32 on Oct. 23. Its poison pill kicks in at 20%.
Some retail chains have also adopted poison pills recently.
Fred's Inc., Memphis, Tenn., "was trading at a 50% discount to our peer group," including Wal-Mart and Kmart, said Chief Financial Officer Richard Witaszak. "At that kind of a discount we wanted to be sure we'd get appropriate value for our shareholders (in a takeover)."
Fred's stock hit a 52-week high of 28 a share, before falling to 101/2 a share. The NASDAQ stock closed at 147/8 on Oct. 23. Its pill kicks in at the 15% threshold.
Loehmann's Holdings, New York, the women's discount clothing chain, and The Sports Authority, Fort Lauderdale, Fla., a sporting goods retailer, both adopted poison pills in September.
DON'T LIKE THEM
However, some corporate governance experts don't have much sympathy for these companies. "It's not going to help institutional shareholder relationships," said Richard Koppes, of counsel to Jones Day Reavis & Pogue, Stanford, Calif. "I think the pills should be put to a vote. The attitude is a little bit the shareholder be damned."
The ISS report notes that so-called "deadhand" poison pill provisions -- which can be redeemed only by the board that enacted them -- have not frequently been part of the new group of poison pills. But according to the report, the outcomes of several pending court cases could change that.
A new tactic, the adoption of limited-duration deadhand pills, also known as "diluted" or "deferred redemption" provisions, which expire at the end of a specified period, such as six months, are now being tested in courts.
In the case of the hostile tender offer by Mentor Graphics Corp., Wilsonville, Ore., for Quickturn Design Systems Inc., Mountain View, Calif., Quickturn amended its poison pill to require a new board to wait six months before redeeming the pill against any bid by an "interested" party. Mentor is suing to overturn it.
In AlliedSignal Corp.'s hostile bid for AMP Inc., Harrisburg, Pa., a judge ruled for AMP, denying Allied's motion to overturn changes that made AMP's pill nonredeemable and nonamendable until Nov. 6, 1999, if control of the AMP board changes. Allied, Morris Township, N.J., is appealing the ruling.
