DeVry's the Prize

Even if your crystal ball is cracked, you could have seen this one coming. Last month, I penned the following fateful words on the subject of for-profit educator DeVry (NYSE: DV  ) and its dismal financial performance: "... it appears that the long-heralded consolidation in the for-profit education game may finally be afoot... DeVry's days as an independent company might well be numbered."

And indeed, last Wednesday, DeVry announced that an unidentified party was making inquiries "about the possibility of a business combination." Apparently, that's corporate speak for: "We're about to make you an offer you can't refuse." For no sooner had the suggestion been made than DeVry jumped into full-scale panic mode, announcing a "shareholder rights plan," also often referred to as a "poison pill."

The plan calls for a special kind of "rights dividend" to be distributed to shareholders on December 6, the rights to which kick in when a would-be acquirer of the company attains at least 15% of its outstanding shares. At that point, shareholders can exercise their rights by purchasing one share of DeVry common stock at half the then-current market price (DeVry would issue new shares to settle the purchases). The effect is to increase the number of DeVry shares that a would-be acquirer must buy to get a controlling stake in the company.

DeVry's shares jumped nearly 19% in response to the company's press release. But that was due more to the news that someone wants to buy the shares -- presumably at a premium -- than to enthusiasm for the poison pill. Such so-called shareholder rights plans would be much more aptly named "management protection plans." If an acquirer can simply bypass management and offer shareholders a good price for their shares, it generally will do so -- giving both the acquirer and the current shareholders what they want, but often leaving management out in the cold. By eating a poison pill, management forces itself back into the discussion. Management can negotiate for a better buyout offer for shareholders, true. But it can also negotiate to keep its jobs after a takeover, for "golden parachutes" for departing executives, and so on.

On the other hand, the benefits accruing to shareholders in DeVry's competitors were much more one-sided. In sympathy with DeVry's price rise, shares of peers ITT (NYSE: ESI  ) , Strayer (Nasdaq: STRA  ) , Apollo Group (Nasdaq: APOL  ) , Career Education (Nasdaq: CECO  ) , and Corinthian Colleges (Nasdaq: COCO  ) also rose in tandem by 3.9% to 5.7%.

Want to learn more about poison pills and why some companies find them so tasty? Read:

Fool contributorRich Smithowns no interest in any of the companies mentioned in this article.


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