Poison Pills and Hostile Takeovers
One of the big stories circulating the business world right now is about Elon Musk and his desire to acquire Twitter. Musk has been critical about their free speech policies and is concerned about censorship. I think he also sees potential in the company such such as diversifying their revenue out of primarily ad revenue. He has said he intends to acquire Twitter for >30% of the current share price, and take it private.
Twitter’s board of directors does not like this, and this week announced they are instituting some defensive measures to counter it. Ironically, Twitter’s founder and ex-CEO, Jack Dorsey, slammed the board for this, calling them a mostly dysfunctional board and agreeing with a Tweet highlighting how poor boards usually destroy companies. Musk’s argument to the board is that they collectively hold almost no shares of Twitter, and don’t have shareholders interests in mind.
The technical term for what Musk is doing is called a hostile takeover, and the Twitter boards response is called a poison pill.
What defines a hostile takeover?
A hostile takeover is when someone tries to buy or takeover a public company without negotiating or pursing an agreement with a companies board of directors, or senior management.
What is a poison pill?
A poison pill is a defensive technique a company can take to avoid a hostile takeover. A poison pill gives all shareholders, except for the one trying to do a hostile takeover, a right to buy more shares in the company at a discounted price. This incentivizes shareholders to buy more stock and increase their ownership percentage in the company, while simultaneously diluting the value of the hostiles shares. This means, if the hostile company wants to own X percentage of a company, it becomes more and more expensive to achieve the desired level of ownership the more diluted they get.
This technique is said to be very effective, almost always resulting in the hostile company withdrawing the attempt.
There are some negatives though. The only way regular shareholders don’t get diluted is if they agree to buy more shares at the discounted price. It might feel like a good deal to shareholders who have cash on hand to buy more and believe the company has a long term future, but to others who don’t, it would not be welcome news.
Twitter’s board has decided to put the poison pill into effect if Musk acquires more than 15% ownership in Twitter. (He currently has 9%).
This dilution to regular shareholders from the poison pill and a generally negative view towards the long term success of Twitter is perhaps why Musk is being taken at least somewhat seriously. Musk is proposing to cash out shareholders at an above market price. On the other side, the Twitter board is basically telling shareholders that unless they want to be diluted, they need to cough up more money to buy more shares.
So what?
If Twitter shareholders believe in the long term success of the company and largely agree to purchase more shares given the poison pill plan, then it’s likely Musk will be priced out. If the poison pill happens though, Musk could decide to dump the 9% ownership in the company he already owns, which may sink the stock a lot. A drastic drop in the stock price could result in a bunch of lawsuits against Twitter from shareholders. So Musk has a bit of leverage even if they poison pill goes into effect. The sense I get is that many Twitter shareholders aren’t happy with the Twitter’s performance, which is why it’s possible this poison pill may not be as effective as others as perhaps many see the premium Musk is offering as their ticket to cash out.
It will be interesting to see how everything plays out.
I don’t have any skin in the game here, so I feel indifferent to whatever happens. I’m not a shareholder or even a Twitter user. I’m just here for the show.