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Alpha Biogenetics Case 27
Poison Pill
Purpose: The case gives the student exposure to the poison pill and the entire issue of antitakeover
amendments. Through running the numbers in the case, the student is able to view how poison pills can
protect the current position of management. There is also dialogue in the case in which the virtues and
drawbacks of poison pills are discussed. The student begins to get a feel for the issues of management
entrenchment versus stockholder rights. Because there is also a venture capital investment and an IPO,
the student is exposed to other areas of corporate finance as well.
Relation to Text: The case draws on material from Chapter 15 and Chapter 17. To a certain extent it goes
beyond material in the text, but any new material is carefully explained within the context of the case.
Complexity: The case is moderately complex. It should require 1 – 1½ hours.
Solutions
1. Values for 2013
30x
32$.
60.9$
EPS
priceStock
P/E
32$.
000,000,5
000,600,1$
Shares
Earnings
shareper Earnings
2. Public price $ 9.60
– Underwriting spread (5%) – .48
Net price $ 9.12
3. Profit on sale of shares
Sales price $ 9.60*
x Shares x 1,200,000
*This assumes no underwriting spread on the secondary offerings of the venture capitalist shares.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
%188
000,000,4$
000,520,7$
Investment
Profit
return of Rate
Given the risk that a venture capitalist takes in early stage financing, it is probably a reasonable
return. Also, keep in mind that the venture capitalist had its funds tied up for a number of years to
achieve the 188% total return.
4. Values for 2016
35x
96$.
60.33$
EPS
priceStock
P/E
96$.
000,000,5
000,800,4$
Shares
Earnings
shareper Earnings
x Percent ownership 25%
6. The inside control group owns 1.8 million shares.
An unfriendly, outside party could acquire the remaining 3.2 million shares out of the 5 million shares
outstanding.
In order to maintain their majority position, the inside control group would need to buy 1,400,001
shares. This would give them a total of 3,200,001 shares.
3,200,001
This represents one more share than the unfriendly, outside party owns.
The total dollar cost would be:
7. In many cases, it appears that poison pills are intended to provide management with job security
Of course, the counter argument is that poison pills allow management to take a long-term perspective
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
