Twitter is trying to thwart billionaire Elon Musk’s acquisition effort with a “poison pill” — a financial tool companies have been working against unwanted suitors for decades.
What to do with poison pills?
The ingredients of each poison pill are different, but they are all designed to give corporate boards the option to flood the market with so much newly created stock that an acquisition becomes prohibitively expensive. The strategy was popularized back in the 1980s when publicly held companies were being pursued by corporate raiders such as Carl Icahn – now often described as “activist investors”.
After announcing that its board had approved a poison pill last Friday while the stock market was closed, Twitter provided more details on Monday. In a regulatory filing that no doubt is trying to block Musk’s $43 billion takeover bid, even though the document doesn’t mention its adversary by name.
Twitter’s plan “works by imposing a significant fine” on any investor who holds at least a 15% stake in the San Francisco company without board approval. If a shareholder deposits a stake of 15% or more then the San Francisco company plan will begin. Musk, best known as the CEO of electric car maker Tesla, currently holds about 9%, but has raised the possibility of buying more stock.
If Musk were to reach the 15% limit, Twitter’s board could give shareholders the right by April 25 to buy one-thousandth of the preferred stock for each of its common shares at a price of $210. This option makes it nearly impossible for anyone to buy Twitter, including Musk, the richest man in the world with an estimated net worth of around $270 billion.
Could the Poison Pill Be a Conversation Tactic?
Although they are supposed to help prevent an unwanted takeover, poison pills also often open the door to further negotiations that may force the bidder to sweeten the deal. If a higher price makes sense to the board, then a poison pill can easily be put aside as well as incendiary, clearing the way for the sale to be completed.
True to form, Twitter left its door open by insisting that its poison pill would not prevent its board from “engaging with parties or accepting an offer to take over” at a high cost.
Taking the poison pill also often results in lawsuits alleging that a corporate board and management team is using tactics to keep their jobs against the best interests of shareholders. These complaints are sometimes filed by shareholders who think a takeover offer is reasonable and want to be redeemed at that price or by a bidder to make the purchase.
How did Elon Musk react to the Twitter announcement?
Musk, a prolific tweeter with 82 million followers on Twitter, has yet to explicitly say anything about the company’s poison pill.
but that posted cryptic tweet indicated on Saturday that he may take his current bid of $54.20-per-share directly to Twitter shareholders, in what is known as a tender offer. “Love me tender,” Musk tweeted with musical notes surrounding the words that were made famous by Elvis Presley in the 1956 hit song.
in Another tweet last week, Musk also indicated that he was ready to fight. “If the current Twitter board takes action contrary to shareholder interests, they will be in breach of their duty,” Musk tweeted. “The obligation they will assume will be Titanic at large.”
Musk has publicly stated that his current bid is his best and final offer for Twitter, but other corporate suitors have made similar statements before eventually moving on. Given his immense wealth, Musk will have enough pockets to expand his offering, although he is still working out how to finance the proposed purchase.
How has this defense worked in the past?
Takeover fights often devolve into gamemanship that includes poison pills and other maneuvers designed to make purchases more difficult. That’s what happened in one of the biggest and most drawn out takeover dances in Silicon Valley history.
After an unsolicited $5.1 billion offer by commercial software maker Oracle to its smaller rival PeopleSoft in June 2003, the two companies spent the next 18 months fighting with each other.
As part of its defense, PeopleSoft not only adopted a poison pill that authorized the board to flood the market with more shares, it also called it a “customer assurance program.” That plan promised customers to pay five times the cost of their software licenses if PeopleSoft was sold over the next two years, creating an estimated liability of up to $800 million for an acquiring company.
PeopleSoft got another helping hand when the US Justice Department filed an antitrust lawsuit to block a takeover, though a judge ruled in Oracle’s favor.
Even though the company ended up selling to Oracle, PeopleSoft’s defense strategy paid off for its shareholders. Oracle’s final purchase price was $11.1 billion – more than double its original bid.