Twitter is trying to thwart billionaire Elon Musk’s takeover attempt with a “poison pill” - a financial device that companies have been wielding against unwelcome suitors for decades.
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What are poison pills for? The poison pill is designed to give corporate boards an option to flood the market with so much newly created stock that a takeover becomes prohibitively expensive. The strategy was popularised back in the 1980s when publicly held companies were being stalked by corporate raiders such as Carl Icahn - now more frequently described as ‘activist investors.’
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Twitter did not disclose the details of its poison pill on Friday, but said it would provide more information in a forthcoming filing with the Securities and Exchange Commission, which the company delayed because public markets were closed Friday. The San Francisco company’s plan will be triggered if a shareholder accumulates a stake of 15 per cent or more. Musk currently holds a roughly 9 per cent stake.
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Can poison pill be a negotiating ploy? Although they are supposed to help prevent an unsolicited takeover, poison pills also often open the door to further negotiations that can force a bidder to sweeten the deal. If a higher price makes sense to the board, a poison pill can simply be cast aside along with the acrimony it provoked, clearing the way for a sale to completed.
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True to form, Twitter left its door open by emphasizing that its poison pill won’t prevent its board from “engaging with parties or accepting an acquisition proposal” at a higher price.
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Adopting a poison pill also frequently results in lawsuits alleging that a corporate board and management team is using the tactic to keep their jobs against the best interests of shareholders. These complaints are sometimes filed by shareholders who think a takeover offer is fair and want to cash out at that price or by the bidder vying to make the purchase.
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Musk’s reaction - Musk on Thursday indicated he was ready to wage a legal battle. “If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty,” Musk tweeted. “The liability they would thereby assume would be titanic in scale.”
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Musk has publicly said that its $43 billion bid is his best and final offer for Twitter, but other corporate suitors have made similar statements before ultimately upping the ante. With an estimated fortune of $265 billion, Musk would seem to have deep enough pockets to raise his offer, although he is still working out how to finance the proposed purchase.
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Poison pills of the past - After business software maker Oracle made an unsolicited $5.1 billion offer for its smaller rival PeopleSoft in June 2003, the two companies spent the next 18 months fighting with each other.
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As part of its defense, PeopleSoft not only adopted a poison pill that authorized the board to flood the market with more shares, it also created what it called a “customer assurance program.” That plan promised to pay customers five times the cost of their software licenses if PeopleSoft was sold within the next two years, creating an estimated liability of up to $800 million for an acquiring company.
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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 twice its original bid.
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