Twitter adopts ‘poison pill’ defense in the face of Elon Musk's takeover bid

How will Musk respond?
Ameya Paleja
Elon Musk and Twitter logo.1, 2

The last two weeks have been quite a whirlwind at Twitter. While the company was happy to welcome Musk to the board of directors after he acquired a sizeable chunk of stock in the company, Musk declined the offer and then suggested a complete buyout of the company, citing no faith in its management.

In the face of this bid, Twitter's board of directors has unanimously agreed to activate a limited-time plan in order to prevent a hostile takeover of the company using shares in the open market. Without naming Elon Musk, the company said in a press release that the plan would be activated if the ownership by a single entity increased beyond 15 percent.

What has the Twitter board done?

Musk's proposal also included a veiled threat of dropping his stake if his offer was not accepted. This would likely plummet Twitter stock prices, however, the board is preparing for a worse scenario, where Musk aggressively pushes to buy more stake in the company and becomes the de-facto owner of the company. 

The Board has, therefore, adopted the shareholder rights plan (rights plan, hereafter) which is designed to negate the impact of the open market accumulation of stock without paying shareholders a 'control premium' or giving the board sufficient time to make informed judgments, the press release said. 

According to the rights plan, Twitter shareholders will be able to acquire more stock in the company at a discounted price if Musk (although not named) or any other entity's stake increases beyond 15 percent. This will allow shareholders to retain their stake in the company while diluting that of the aggressor, CNN reported. The Plan does not apply to the entity whose stake is above the cutoff. 

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In financial parlance, this strategy is called the 'poison pill' since it makes it difficult for the aggressor to acquire his target. The aggressor needs to now shell out more to acquire the company. It also makes the company less attractive as a buying option, protecting minority shareholders. 

How is Musk likely to respond to this? 

Financial analysts told CNN that this move is a classic defense strategy used by companies being acquired and it is likely that Musk's lawyers were expecting this to happen. 

The aim of the move is not to deter the parties interested in the company but to bring them to the negotiating table and eke out a higher valuation. The press release also states that activating the rights plan does not mean that the board cannot engage with the interested parties or accept a proposal that benefits the company and its shareholders. The Rights Plan expires on April 23 next year. 

Musk, who already faces a lawsuit for not disclosing his Twitter stake on time, can take the legal route. However, experts told AP News that no court has overturned a 'poison pill' in the last 30 years. 

Interestingly, after Musk's move, Vanguard group, holders of the Twitter stock increased their stake beyond that of the Tesla CEO. At 10.3 percent, they are now the largest stakeholders in Twitter, The Guardian reported and the company has also attracted interest from other buyers. 

After all this, Musk might just be a swift exit at a higher stock price than he bought it at and continue tweeting on the platform as he has always done.

Who knows what's on Elon's mind. 

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