Optimal deterrence and inducement of takeovers: An analysis of poison pills and dilution

The paper presents a theoretical alternative to the commonly held belief that poison pills affect shareholder wealth negatively. Specifically, the paper models how ex ante shareholder wealth can be maximized with contractual provisions that resemble poison pill plans and, reversely, voluntary dilution à la Grossman and Hart (1980) by allowing an optimal choice of takeover probabilities and premia. The model's predicitions are consistent with recent empirical evidence [Comment and Schwert (1995)]. The paper shows that, under optimal employment of the proposed provisionsa, the comparative statics on takeover probabilities and premia differ partially from those proposed in Shleifer and Vishny (1986). As an extension, an analysis of the wealth effects of changes in the control threshold, as implied by, e.g., supermajority rules and a mandatory bid rule, is conducted.