Shares of international media giant News Corp. (NYSE:NWS) fell nearly 4% yesterday following the company's announcement that it adopted a "shareholder rights plan," better known as a "poison pill" -- and the connotations of the latter term should explain to novice investors why something known by the former might not be welcomed by investors.
Among other provisions, the "poison pill" -- put in place, in the company's words, to "protect the best interests of all shareholders" -- gives News Corp. investors the right to buy shares of the company at a discount should an outside organization obtain (or attempt to obtain through a tender offer) at least 15% of the company. Generally speaking, investors tend not to like these plans because they're seen as a takeover defense that could hurt liquidity.
As fellow Fool Bill Mann explains it: "Here's the deal with 'poison pills' -- they should more accurately be known as 'management rights plans,' since what they do is actually limit shareholders' ability to choose whether to go along with a hostile takeover on its merits. Most successful mergers usually result in gains in stock price of the acquired company. In many cases, the driving rationale for the acquirer to attempt to take over the company is poor management at the target company."
It isn't always clear what event triggers a company's decision to adopt a "poison pill." However, in this case, it's crystal clear.
Last week Liberty Media (NYSE:L) entered into a transaction with a division of Merrill Lynch (NYSE:MER) that, upon completion, would boost its share in News Corp. from 9% to 17%.
News Corp, essentially a family operation with Rupert Murdoch's kin owning about 30% of the company, clearly doesn't like the looks of Liberty's interloping: The "poison pill" allows the transaction but would be triggered should Liberty try to buy a bigger stake in News Corp.
What will happen next should be interesting: A CBS MarketWatch report indicates (unsurprisingly, given the larger-than-life status of moguls Murdoch and Liberty's John Malone) that Liberty dealt with Merrill without consultation with News Corp. That's not exactly polite and certainly suggests that Malone has designs on the company's post-Murdoch future -- if not something more immediate.
News Corp controls some big names in publishing and broadcasting, including British Sky Broadcasting (NYSE:BSY), Fox Entertainment (NYSE:FOX), and The New York Post tabloid newspaper.
Fool contributor Dave Marino-Nachison doesn't own any of the companies in this story.
