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SEC Economists Say ‘Poison Pill’ Defense Can Hurt Stockholders

March 11, 1986

WASHINGTON (AP) _ Stockholders can be harmed by a defensive tactic being used by some corporations seeking to scare off hostile takeover bids, Securities and Exchange Commission economists said Monday.

The ″poison pill″ strategy ″is bad medicine for stockholders,″ said Gregg Jarrell, a co-author of an SEC report on how the tactic affects stock of the target corporation.

The strategy, aimed at warding off unwanted takeovers by making a company prohibitively costly to acquire, can decrease the company’s market value, the economists concluded.

The study by the Office of the Chief Economist was based on 37 firms that have used various kinds of poison pills since 1983.

″Original poison pills, such as the one adopted by the Lenox Co., gave holders of common stock a dividend of preferred stock convertible into common stock,″ said the study, also written by economist John Pound.

The shares were redeemable for cash if an outside party acquired the company.

Commission economists studied stock market reactions to poison pills for the two days following company anouncements of their implementation.

″We find that although all pills have not been invincible, their adoption has not been well received by the capital markets,″ said their report.

Overall, market prices declined by 0.93 precent - not a statistically significant figure, said the SEC.

One reason for the low percentage is that five companies in the sample experienced other, significant events during the two days, generally announcement of a higher bid, said the report.

But excluding those five from the sample, the market price decline is 1.42 percent, a figure the SEC terms ″a significant amount.″

Further analysis done by the economists also showed that 12 of the firms in the sample were not the subject of takeover speculation.

″Removing those firms from the sample, and computing market reaction to announcement of poison pills by companies that were the subject of takeover speculation, showed that average stock prices fell by 2.39 percent - a very significant amount,″ the report said.

The economists, in releasing their report, also cautioned that the evidence ″is not a sufficient basis on which to judge right and wrong in a public policy context.″

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