Poison Pill Use in the Banking Industry

Introduction
The 1980s was an era of expansive mergers and acquisitions fueled by the popularity of corporate raids. Although this drastically changed the landscape ofmany industries, the banking industry was relatively untouched. Commercial banks were protected from hostile takeovers by federal regulations. The McFadden Act of 1927 and the Bank Holding Company Act of 1956 supported the existence of 24,495 small banksl in 1985.However, by 2003 there were 11,021 small banks and 80 banks had adopted a poison pill plans (Critchfield, Davis, Davison, Gratton,Hanc, Samolyk, 2004). The Riegle Neal Interstate Banking and Branching Efficiency Act of 1994 was the catalyst of the rapid consolidation. Prior to this act, a commercial bank could only make acquisitions across state lines if state the bank was operating in and the state of the target allowed interstate banking. Riegle Neal removed state and federal restrictions on bank mergers creating rapid consolidation in the industry.
During this period of deregulation, a growing number of banks adopted poison pill plans. A poison pill plan is a defensive measure adopted by a management team to protect a company from an unwanted takeover. Functionally, this measure releases additional shares of stock, at a discount, to shareholders of record when an unwanted acquirer achieves pre-specified stake in the company. This version of a poison pill plan is known as "flip-in rights." Stockholders are allowed to flip-in their "shareholder's rights,,3 in return for additional shares of the company (Fleischer and Sussman, 2000). Although, there are other varieties of poison pills, the flip-in right was predominantly used by the banking industry between 1987 and 2004.
The commercial banks are unique because federal regulation minimizes the number of takeovers. The three prior hypotheses do not apply as neatly to banks because the intent behind a poison pill adoption is different. First, banking takeovers or mergers are characterized as being "friendly." Because of thi s , a poison pill used to entrench a management team is unnecessary. Secondly, hostile takeovers of commercial banks usually fail because of the stringent and lengthy approval process (Brewer III, Jackson III, and Wall, 2006). The time necessary for regulatory approval functions as a defensive measure. Finally, the absence of a poison pill plan in this industry has resulted in increased takeover premiums and management benefits (Brewer III, Jackson III, and Wall, 2006). Acquirers do not have to fear the implementation of costly defensive measures and reward the target company accordingly. Despite these differences in the banking industry, more than 70 commercial banks adopted a poison pill plan between 1986 and 2003.
Indian legal framework vis-a-vis Poison Pills
In India, the law pertaining to takeovers is embodied in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, commonly called the Takeover Code and the SEBI (Disclosure & Investor Protection Guidelines), 2000. Apart from these, various provisions of the Companies Act, 1956 need to be referred to as and when required. At the outset, the regulatory framework governing Indian capital market does not pose any insuperable impediment to a determined hostile acquirer. It simply mandates the acquirer to make public disclosure of his shareholding or voting rights to the target company as well as the stock exchange on which its shares as listed, if he acquires shares or voting rights beyond pre-determined threshold limits . Also, in case he wishes to acquire control over a target company, the acquirer has to make a public announcement of the same, stating lucidly various details of the bid including his intention of acquisition, his identity, details of offer price and number of shares to be acquired from public, future plans (if any), change in control over the target company, amongst others. This paves way for an informed decision as well as planned course of action.
The Takeover Code also restricts the corporate actions of target companies during the offer period, such as transferring assets or entering into material contracts and prohibiting issue of any authorized but unissued securities during the offer period . Furthermore, the shareholder rights plan sanctions the target companies to issue shares at a discount and warrants which convert to shares at a discount, even without shareholder approval, which is illegal in the Indian context unlike the U.S. where companies are permitted to do so. The DIP Guidelines require the minimum issue price to be determined with reference to the market price of the shares on the date of issue or upon the date of exercise of the option against the warrants. Such issue must also be approved by shareholders. Without the ability to allow its shareholders to purchase discounted shares/options against warrants, an Indian company would not be in a position to dilute the stake of the hostile acquirer and also seeking shareholder approval in the event of a takeover attempt is a very time-consuming process, thereby making impossible poison pills to operate within the existing Indian legal framework. Apart from this, in the event of a takeover bid, all the directors of the target company may be removed in a single shareholders meeting, as permitted under the Companies Act, 1956, thus making futile the Staggered Board defence available to foreign companies.
Thus, Indian market can be safely concluded to be a pro-acquire market. Several regulatory changes would be required to give effect to these takeover defences in India. In the meanwhile, other defences such as ‘’brand pills’’ are home to Indian Companies like Tata who have in place an arrangement whereby anyone who acquires any of its entities, may not be allowed to use its name or brand. By depriving the right to use the brand name, the acquirer loses out on a considerable portion of the target company’s valuation and this serves as an acquisition deterrent.
India is yet to foray into the realm of poison pills and shark repellants.

LITERATURE REVIEW

According to Malatesta and Walking (1988) and Ryngaert's (1988) hypothesis, a banks management team adopts a poison pill out of self-interest. The cost of this maneuver is measured by a decrease in share price. After announcement,stockholders lose faith in the management t e am' s abilities or are upset about the poison pill adoption not being raised raise for a vote. Bojanic and Officer (1994) discovered that the shareholder reactions decrease the stock return by -0.475% two days after the plan is announced. However, there are many variables that surround the adoptions of a poison pill plan. Unless the adoption is the response to an immediate takeover bid, the effects are not fully measured in a two-day period. Opposite this scenario, if a poison pill was adopted as a routine measure, then the two-day effect is representative of the shareholders reactions. A two-day period is too short to analyze the banking industry, as its adoptions are predominantly classified as "routine measures.
Brewer III, Jackson III, and Wa l l ' s (2006) found that bank management uses defensive measures as bargaining tools. However, the bargains raised the takeover premium but also benefited the managerial team by securing a large severance package or a position in the acquiring company. Additionally, this industry is historically characterized for its friendly takeovers, and the deals are friendliest when the bank management has an assured interest in the deal (Brewer III, Jackson III, and Wall, 2006).The stockholders benefit when this interest is based on stock ownership.

Pearce II and Robinson Jr., 2004)
A positive affect of adopting a poison pill plan is an increase in takeover premium. Strategically, this creates firm stability allowing for long-term research and development (Pearce II and Robinson Jr., 2004). The Riegle Neal Act has increased the probability of a bank takeover, but the results on the number of anti-takeover strategies adopted have not been measured. Using the Akhigbe et al (2004) results as a basis, the logical result of an increased probability of a bank takeover is an increased number of poison pill adoptions.

Additional evidence supports Comment and Schwert (1995) and Heron and Li e ' s (2000) increased value hypothesis. The traditionally "friendly" terms? mergers and acquisitions in the banking industry are conducted under reduces cases ofmanagerial entrenchment. However, friendly deals us e a poison pill as leverage in negotiating the takeover premium and details (Heron and Lie, 2000). I f a poison pill is adopted to increase firm value, an increase in Return on Equity (ROE) will be noted.

poison pill adoptions have proven to positively increase operating perfonnance as measured by Return on Assets (ROA) (Danielson and Karpoff, 2006).

economy wide studies found that a poison pill adoption can have a negative affect on value and perfonnance (Srinidhi and Sen, 2002). A poison pill enables a company to engage in long-tenn research and development, which decreases ROE and ROA. Under these conditions, the poison pill adoption yields positive results in the long-tenn. In comparison with Malatesta and Walking (1988) and Ryngaert (1988), who noted negative market reactions, these studies noted positive financial results over a longer period

Current banking literature explains the acquisition trend, but does not explain the effect of a poison pill adoption. In the post Riegle-Neal period, banks are engaging in acquisitions to diversify into new geographic areas and product markets based on the "earnings diversification" hypothesis (Brewer III, Jackson III, and Jagtiani, 2000). The intent is to create banks that are ''too-big-to-fail'' and can exploit the remaining regulations by sheer size. As a result of the "grow or die philosophy," large commercial banks are actively acquiring community banks. In response, many community banks are making friendly takeover attempts to increase their size. However, the bulk of these mergers fail due to the lack of financial resources and stringent regulations (Kline, 1997).

strategic move by a takeover-target company to make its stock less attractive to an acquirer. For instance, a firm may issue a new series of preferred stock that gives shareholders the right to redeem it at a premium price after a takeover. Two variations: a flip-in poison pill allows all existing holders of target company shares except the acquirer to buy additional shares at a bargain price; a flip-over poison pill allows holders of common stock to buy (or holders of preferred stock to convert into) the acquirer’s shares at a bargain price in the event of an unwelcome merger.
Such measures raise the cost of an acquisition, and cause dilution, hopefully deterring a takeover bid. A third type of poison pill, known as a people pill, is the threat that in the event of a successful takeover, the entire management team will resign at once, leaving the company without experienced leadership - Barrons Finance and investment

Conclusion:
Poison pills can thus be termed as a necessary evil in an age of rising mergers and acquisitions. However, their sharp decline also reflects a change in the attitude of the investors and their increasing participation in management decisions. Gone are the days when investors had blind faith in the board’s decision. Shareholder activism and corporate governance measures have practically changed the traditional perception of hostile takeovers and their defences. With the shareholders determined to get the best value for their investment at any cost, the negative image of ‘hostile acquirer’ or say an ‘acquirer’ amongst the shareholders of the target company seems to be a thing of the past. There is absolutely no melodrama revolving a takeover attempt, which is now evaluated strictly on merits and from a purely business perspective. The recent sale of Indian pharmaceutical giant Ranbaxy to a Japanese drug discoverer, Daiichi Sankyo bears testimony to this. Against the background of increasing hostile acquisitions, it is therefore too early to conclude whether poison pills do the vanishing act or make a surprise comeback.