Final answer:
A poison pill is a defensive strategy against hostile takeovers, allowing existing shareholders to buy additional shares at a discount, thereby diluting the acquirer's share and making the takeover more expensive.
Step-by-step explanation:
A poison pill is a defense strategy used by companies to prevent or discourage a hostile takeover. This term generally refers to a shareholder rights plan that is designed to make the targeted company less attractive to the acquirer. When a company activates the poison pill, it allows existing shareholders (except the potential acquirer) to purchase additional shares at a discount. This action dilutes the shares held by the acquirer and makes the takeover more expensive and less desirable.
For example, if a company issues a poison pill that lets existing shareholders buy one new share at half price for each share they own, it would quickly dilute the ownership percentage of the acquirer, making the acquisition much more difficult. This method is often seen as a way for the target company's board to negotiate with the acquirer from a position of strength or to buy time to find a more favorable merger partner. The decision to implement a poison pill is typically made by the board of directors of the company under threat.