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Murdoch’s poison pill

Breaking up is hard to do. Sometimes one side isn’t quite ready to see the other move on. News Corp (ASX: NWS) will soon be splitting itself in to two separate companies. The publishing operations will keep the ‘News Corp’ name, while the cable television channels and film studio will form a new company under the name ‘21st Century Fox’. But despite the split, the existing management team have made it clear that they aren’t willing to risk the company falling into the hands of another.

Rupert Murdoch, the executive chairman of News Corp, has during the past week been defending the company’s adoption of a ‘poison pill’ provision. In the Australian leg of an investor road show, he commented “I know it’s uncommon in this country, but it’s very common in America in these situations”.

A ‘poison pill’ is a defence mechanism put in place to ward off a hostile takeover.  Much like a classic spy movie where the secret agent chomps down on a cyanide tablet before he can be interrogated, its purpose is to prevent capture by enemy forces. Also known as a ‘shareholder rights plan’, the typical structure gives existing shareholders the right to buy new shares at a discount if a takeover event is triggered, thereby diluting the stake of the would-be acquirer.

News Corp’s split comes as the publishing industry undertakes a major transition from print to online. News Corp’s largest Australian rival, Fairfax Media (ASX: FXJ), also announced significant restructuring this past week aimed at cutting a further $60 million of costs, and will be joining News Corp in erecting a ‘paywall’ around its online content.

News Corp’s new provision is set to last one year. It will allow existing shareholders to buy stock at a 50% discount, and is triggered if any new investor were to buy 15% or more of the company’s Class B voting shares. The immediate dilution would make it very difficult for any potential suitor to build a significant stake in the company.

Poison pills are often bad medicine for small shareholders. Existing managers have less threat of being replaced by a new majority owner, regardless of their performance. They can also stop shareholders from getting a chance to vote on good takeover offers. At their best, they can prevent a predatory takeover before a company is able to fully achieve its vision. In this case it may help buy some precious time for the changes necessary at News Corp to take place.

Foolish takeaway

Although less common in Australia, investors should be cautious of any company looking to create a new ‘poison pill’ provision. Despite being sold to shareholders as protection against predatory takeovers, they are instead often used to protect underperforming management teams. News Corp shareholders will be hoping that the company can use the security of its ‘poison pill’ to make the tough choices necessary for its publishing operations to prosper in the online world.

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Motley Fool contributor Matt Joass does not own shares in any of the companies mentioned in this article.

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