Twitter is trying to thwart billionaire Elon Musk’s takeover attempt with a “poison pill”.
Twitter is trying to thwart billionaire Elon Musk’s takeover attempt with a “poison pill” – a financial device that companies have used against unwanted suitors for decades.
WHAT SHOULD POISONOUS PILLS DO?
The ingredients in each poison pill vary, but all are designed to give corporate boards the option of flooding the market with so much newly created stock that an acquisition becomes prohibitively expensive. The strategy was popularized in the 1980s when publicly traded companies were being pursued by corporate attackers like Carl Icahn – now more often described as “activist investors”.
Twitter did not release the details of its poison pill on Friday, but said it would provide more information in an upcoming filing with the Securities and Exchange Commission, which the company delayed because public markets were closed on Friday.
The San Francisco company’s plan will be triggered if a shareholder accumulates a stake of 15% or more. Musk, best known as the CEO of electric car maker Tesla, currently holds a roughly 9% stake.
CAN A POISON PILL BE A TRADING SCAM?
While supposedly helping to stave off an unsolicited takeover, poison pills also open the door to new negotiations that could force a bidder to sweeten the deal. If a higher price makes sense to the board, a poison pill can simply be set aside along with the bitterness it provoked, clearing the way for a sale to be completed.
True to form, Twitter left the door open by emphasizing that its poison pill will not prevent its board from “engaging with shares or accepting a takeover proposal” at a higher price.
Adopting a poison pill also frequently results in lawsuits alleging that a corporate board and management team are using the tactic to keep their jobs against the best interests of shareholders. These complaints are sometimes filed by shareholders who think a takeover bid is fair and want to cash out at that price or by the bidder who is competing to make the purchase.
HOW ELON MUSK REACTED TO THE TWITTER ANNOUNCEMENT?
Musk, a prolific tweeter with 82 million Twitter followers, had no immediate reaction to the company’s poison pill. But on Thursday he indicated he was ready to fight a legal battle.
“If the current Twitter board takes actions contrary to shareholders’ interests, they would be violating their fiduciary duty,” Musk tweeted. “The responsibility they would assume would be titanic in scale.”
Musk has publicly said his $43 billion bid is his best and final offer for Twitter, but other corporate suitors made similar statements before finally upping the ante. With an estimated fortune of $265 billion, Musk appears to have deep enough pockets to increase his offer, although he is still studying how to fund the proposed purchase.
HOW DID THIS DEFENSE WORK IN THE PAST?
Acquisition disputes often dissolve into a game that includes poison pills and other maneuvers designed to make acquisition more difficult. That’s what happened in one of the biggest and most protracted takeover dances in Silicon Valley history.
After business software maker Oracle made an unsolicited $5.1 billion offer to rival PeopleSoft in June 2003, the two companies spent the next 18 months fighting each other.
As part of its defense, PeopleSoft not only adopted a poison pill that authorized the board to flood the market with more stock, it also created what it called a “customer assurance program.” software licenses if PeopleSoft were sold within the next two years, creating an estimated liability of up to $800 million for an acquiring company.
PeopleSoft also received further help when the US Department of Justice filed an antitrust lawsuit to stop a takeover, although 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 the original bid.