According to reports, on Friday, the American microblogging and social networking site, Twitter said that it is planning on adopting a limited duration shareholder rights plan, a tactic which is commonly referred to as the ‘poison pill’ defense that is said to be used by companies in order to fend off takeover attempts, fairly similar to the one that Twitter is facing.
In simpler words, Twitter Inc. is known to have adopted a poison pill this Friday with an aim to simply limit Elon Muk’s ability to raise his stake in the said social media platform, as a buyout firm emerged to challenge his bid for the company which was itself around 43 billion dollars.
Having said that, though the company is not naming Elon Musk directly, Twitter is clearly trying to stop the billionaire from buying the social networking platform. Since some of you might not be very well versed with what exactly is it all about, let me brief you about the same.
To begin with, a few days ago, the billionaire entrepreneur and the CEO of Tesla, Elon Musk offered to take over Twitter in a deal that is said to be valued somewhere around 43 billion dollars, thus lambasting the overall management of the company while making a statement that, he’s the person who can manage to unlock the ‘extraordinary potential’ of a communication platform which is used by more than 200 million people on a daily basis.
Not just that, Musk is known to currently own nearly 9.2 percent of Twitter and as mentioned, he has made an offer for the acquisition of 100 percent of the company’s shares as also revealed in a filing with the U.S. Securities and Exchange Commission. In addition to this, Musk is said to have made a statement saying that, he is willing to pay 54.20 dollars per share and it would be an all-cash offer.
Also, while this seems like a really big number, Musk’s offer is not that generous as Twitter’s stock was trading somewhere around 60 dollars just a couple of months back. Having said that, sure, tech stocks are currently facing a rathe massive selloff, however, Twitter’s business seems to be doing just fine right now!
Before moving any further, l think it’s probably best if we first talk about what exactly is a Poison pill strategy in order for you to have a much better understanding of the report.
What is a Poison Pill Defense?
To begin with, the move that is known to be taken by Twitter is not formally referred to as a poison pill but instead, that is how the corporate world refers to it. However, what the Twitter board is said to have unanimously agreed upon is actually known as a limited duration shareholder rights plan.
Nevertheless, the term Poison Pill commonly refers to a defense strategy of sorts that is known to be used by a target firm in order to discourage or simply prevent a potential hostile takeover by saying an acquiring company. Potential targets are said to make use of this tactic to make them look less attractive to the potential acquirers.
In other words, Poison Pill is a defense mechanism of sorts that gives existing shareholders the option to purchase even more shares at a relatively lower price, thus effectively diluting a new, hostile party’s ownership stake. Furthermore, it is probably worth noting that, the poison pill strategy is known to have been first developed by a New York-based firm Wachtelll, Lipton, Rosen, and Katz back in the 1980s.
Apart from this, for some of you wondering as to why is it called a poison pill? Allow me a chance to explain. The term stems from the commonly known practice of spies carrying a poison pill that they could simply inject if in case they were captured by enemies, thus preventing them from extracting any knowledge through torture or other means.
While the said poison pill strategy is significantly bad for all shareholders in the company in the near term, it is also known to make it rather difficult for the hostile party, in this case, Musk, to buy all of the new shares.
Moreover, the flip-in and the flip-over poison pill tactics are the two types of strategies, while the flip-in option is much more popular of the two options. Speaking of the flip in poison pill, it talks about allowing shareholders to purchase additional shares at a discount, excluding the acquirer. While purchasing additional shares offers stockholders with immediate profits, the strategy is simply known to dilute the overall value of the acquiring company’s limited number of shares that are already owned.
On the other hand, the flip-over poison pill strategy talks about allowing shareholders of the target company to buy shares of the acquiring company at a significantly lower price as it threatens to dilute as well as devalue the stock of the corporation that I attempting to take over the target, the tactic also functions as a hostile takeover defense.
Coming back to the topic, The Rights Plan is said to reduce the overall likelihood that any person, entity, or even a group can possibly gain control of Twitter with the help of an open market accumulation without paying all shareholders an appropriate premium for control or even without proving the board the sufficient time in order to make a much-informed judgment and take the required actions that are in the best interest of the shareholders, “Twitter said in a recent press release.
Not just that, by adopting the said poison pill, Twitter focuses on diluting anyone amassing a stake in the company of more than 15 percent by selling more shares to other shareholders at a discount. Also, the said shareholder’s right plan or the ‘poison pill’ will be in place for 364 days and is simply marking Twitter’s very first step in fighting Musk’s offer to buy the company.
Basically, it all started when, in a TED Talk in Vancouver when asked about his bid, Musk, the second-largest shareholder of Twitter said, “I think it’s very important for there to be an inclusive arena for free speech”. This is when, Musk actually hinted at the possibility of a hostile bid in which he would do nothing but bypass Twitter’s board and simply put the offer directly to its shareholders, tweeting: “It would be utterly indefensible not to put this offer to a shareholder vote.”
Having said that, this is not the first time something like this has happened but instead, it is more common than you might think it to be. For instance, Oracle, an American Multination computer technology corporation, made an unsolicited offer of about 5.1 billion dollars for its smaller rival PeopleSoft back in June 2003, while PeopleSoft had also taken the Poison pill into action. Also, another example of this can be of the popular online streaming platform, Netflix when in order to prevent Karl Icahn from attempting a hostile takeover.
At this time, Netflix also implemented a poison pill (shareholder rights plan) back in 2012 and immediately went on the defensive after learning that the man had already purchased a 10 percent stake in the company. As a result, any attempt in order to purchase a large ownership position in Netflix without the approval of the board would bring in a pool of new shares into the market, making any investment acquisition extremely costly.
All in all, if Musk manages to acquire 15 percent or more of twitter’s stock, then other shareholders in the company would also be able to buy more shares at a fairly discounted price. This would actually make it much more expensive for Musk to increase his said stake in Twitter. Since purchasing shares also comes with voting rights, Musk has been calling for a shareholder’s vote on his offer and twitter’s poison pill defense also makes it much more tougher for him to get enough votes in favor of the sadi acquisition.
Lastly, on Friday, Musk did not directly address the poison pill on Twitter, but he did retweet a poll showing the support for his possible purchase of Twitter. He added, “Thanks for the support!”
Reading so far, you must have understood by now as to what exactly is this hostile takeover that Elon Musk is planning for the global communication platform, Twitter and by now you must be able to analyze the situation on your own.
In conclusion, what are your thoughts on Twitter’s Poison Pill strategy as a defense for Elon Musk’s hostile takeover plan? Do let us know in the comments area below. To know more about such reports, do check out other articles we have on our website. Thank you for your time & if you found our content informative, do share it with your investor friends!
Also read: Elon Musk’s hostile takeover plan for Twitter: Everything you need to know
