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
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
Want to learn more about poison pills and why some companies find them so tasty? Read:
- Moguls Match Up Over News Corp.
- Greenbrier's Poison Pill
- Rash of Activism at Staples
- Hollinger's Poison Pill
Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.
