Will Twitter’s ‘poison pill’ strategy stop Elon Musk’s hostile takeover?
Twitter adopted a so-called poison pill to make it much harder for Musk to take over the company
What’s a poison pill?
Poison pillswere developed in the early 1980sas a defense tactic against corporate raiders to effectively poison their takeover efforts – sort of reminiscent of the suicide pills thatspies supposedly swallow if captured.
There are manyvariants of poison pills, but they generally increase the number of shares, which then dilutes the bidder’s stake and causes them a significant financial loss.
Let’s say a company has 1,000 shares outstanding valued at $10 each, which means the company has a market value of $10,000. An activist investor purchases 100 shares at the cost of $1,000 and accumulates a significant 10% stake in the company. But if the company has a poison pill that is triggered once any hostile bidder owns 10% of its stock, all other shareholders would suddenly have the opportunity to buy additional shares at a discounted price – say, half the market price. This has the effect of quickly diluting the activist investor’s original stake and also making it worth a lot less than it was before.
Twitter adopted a similar measure. If any shareholder accumulates a 15% stake in the company in a purchase not approved by the board of directors, other shareholders would get the right to buy additional shares at a discount, diluting the 9.2% stake Musk recently purchased.
Poison pills are useful in part because they can be adopted quickly, but they usually have expiration dates. The poison pill adopted by Twitter, for example, expires in one year.
A successful tactic
Many well-known companies such asPapa John’s,Netflix,JCPenney, andAvis Budget Grouphave used poison pills to successfully fend off hostile takeovers. Andnearly 100 companies adoptedpoison pills in 2020 because they were worried that their careening stock prices, caused by thepandemic market swoon, would make them vulnerable to hostile takeovers.
No onehas ever triggered– or swallowed – a poison pill that was designed to fend off an unsolicited takeover offer, showing how effective such measures are at fending off takeover attempts.
These types of anti-takeover measures are generally frowned upon as apoor corporate governance practicethat can hurt a company’s value and performance. They can be seen as impediments to the ability of shareholders and outsiders to monitor management and are more about protecting the board and management than attracting more generous offers from potential buyers.
However,shareholders may benefit from poison pillsif they lead to a higher bid for the company, for example. This may be already happening with Twitter as another bidder – a $103 billion private equity firm –may have surfaced.
A poison pill isn’t foolproof, however. A bidder facing a poison pill could try to argue that the board is not acting in the best interests of shareholders and appeal directly to them through either atender offer– buying shares directly from other shareholders at a premium in a public bid – or aproxy contest, which involves convincing enough fellow shareholders to join a vote to oust some or all of the existing board.
And judging by his tweets to his82 million Twitter followers, thatseems to be what Musk is doing.
Article byTuugi Chuluun, Associate Professor of Finance,Loyola University Maryland
This article is republished fromThe Conversationunder a Creative Commons license. Read theoriginal article.
Story byThe Conversation
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