Twitter is trying to stop billionaire Elon Musk’s takeover attempt by using a “poison pills”–a financial tool that companies have used for decades against unwelcome suitors.
What are POISON PILLS SUPPOSED to DO?
Although the ingredients of each poison pill are different, they all have one thing in common: They allow corporate boards to flood the stock market with new stock so that takeovers become prohibitively costly. This strategy was popularized in 1980s, when public companies were being hounded by corporate raiders like Carl Icahn. It is now known as “activist investors”.
Twitter did not disclose details about its poison pill on Friday. However, it stated that it would provide additional information in a future filing with the Securities and Exchange Commission. This delay was caused by Friday’s close of the public markets.
If a shareholder holds a 15% or greater stake in the San Francisco company, it will trigger its plan. Musk, who is best known for his role as CEO at Tesla’s electric car manufacturer, holds approximately 9% of the stake.
Is a POISON PILL a NEGOTIATING PLAY?
Poison pills are meant to prevent unsolicited takeovers, but they can also open up the possibility of further negotiations that could force bidders to sweeten the deal. A poison pill can be thrown out with the anger it caused, providing that a higher price is acceptable to the board.
Twitter was true to its word and left the door open for potential acquisitions.
A common tactic of taking a poison pill is to file lawsuits against corporate boards and management teams alleging they are using this tactic to protect shareholders’ interests. Sometimes, shareholders file these complaints because they believe a takeover offer to be fair and want to cash in at the same price as the bidder who is trying to purchase the company.
HOW DIDN’T ELON MUSK FEEL ABOUT TWITTER ANNOUNCEMENTS?
Musk, a prolific Twitter user with over 82 million followers, did not immediately react to the poison pill being offered by the company. However, Musk indicated that he was prepared to fight a legal battle on Thursday.
Musk tweeted, “If the Twitter board takes actions against shareholder interests, they would be violating their fiduciary obligation.” Musk tweeted, “The liability they would assume would be immense in scale.”
Musk has made public statements that his $43 billion offer is his final and best offer for Twitter. However, other corporate suitors have made similar statements before eventually increasing the ante. Musk, who is estimated to be worth $265 billion, would appear to have enough money to increase his offer. However, he is still trying to figure out how to finance it.
WHAT HAS THIS DEFENSE DONE IN THE PAST
Many takeover disputes end in gamesmanship, which includes poison pills and other maneuvers to make it more difficult for a buyer. This is what happened at one of Silicon Valley’s longest and most complicated takeover dances.
The two companies spent 18 months fighting each other after Oracle, a business software company, made an unwelcome $5.1 billion offer for PeopleSoft in June 2003.
PeopleSoft adopted a poison pill to defend itself. It also established what it called a customer assurance program. Customers would be paid five times the price of their software licenses if PeopleSoft is sold within two years. This could create a liability of as high as $800 million for the acquiring company.
PeopleSoft was also helped by the U.S. Department of Justice who filed an antitrust lawsuit to stop a takeover. However, a judge ruled in Oracle’s favor.
PeopleSoft’s defense strategy was a success for its shareholders, even though it ended up being sold to Oracle. Oracle paid $11.1 billion for its final purchase — more than twice the original offer.
