What is Twitter’s “poison pill” and how will it work against Elon Musk’s takeover?

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Twitter is trying to thwart billionaire Elon Musk’s takeover bid with a “poison pill” – a financial device companies have wielded against unwanted suitors for decades.

The ingredients in each poison pill vary, but they’re all designed to give boards the ability to flood the market with so many newly minted stocks that a takeover becomes prohibitively expensive. The strategy was popularized in the 1980s when public companies were hounded by looters such as Carl Icahn – now more frequently described as “activist investors”.

Twitter did not disclose details of its poison pill on Friday, but said it would provide more information in an upcoming Securities and Exchange Commission filing, which the company delayed because public markets were closed on Friday. .

The San Francisco company’s plan will be triggered if a shareholder accumulates a stake of 15% or more. Musk, best known as the CEO of electric car maker Tesla, currently owns a roughly 9% stake.

Although supposed to help prevent an unsolicited takeover, poison pills 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 pushed aside with the acrimony it has caused, paving the way for a sale to be made.

True to form, Twitter left its door open stressing that its poison pill will not stop its board from “engaging with parties or accepting an acquisition proposal” at a higher price. .

Adopting a poison pill also frequently results in lawsuits alleging that a board and management team use the tactic to retain their jobs against the best interests of shareholders. These complaints are sometimes made by shareholders who think a takeover bid is fair and want to cash out at that price or by the bidder vying to make the purchase.

Musk, a prolific tweeter with 82 million Twitter followers, had no immediate reaction to the corporate poison pill. But on Thursday, he indicated he was ready to fight a legal battle.

“If the current Twitter board takes action contrary to the interests of shareholders, it would violate its fiduciary duty,” Musk tweeted. “The responsibility they would thus assume would be of titanic magnitude.”

Musk has publicly said his $43 billion bid was his best and final bid for Twitter, but other contending companies made similar claims before finally upping the ante. With an estimated fortune of $265 billion, Musk appears to have enough pockets to increase his offer, although he is still looking to fund the proposed purchase.

Takeovers often turn into a game that includes poison pills and other maneuvers designed to make a takeover more difficult. That’s what happened in one of the biggest and longest takeover dances in Silicon Valley history.

After enterprise software maker Oracle made an unsolicited $5.1 billion bid for its smaller rival PeopleSoft in June 2003, the two companies spent the next 18 months battling it out.

As part of its defense, PeopleSoft not only adopted a poison pill that allowed the board to flood the market with more shares, but it also created what it called an “insurance program. customer”. This 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 $800 million for an acquiring company.

PeopleSoft also received another helping hand when the US Department of Justice filed an antitrust lawsuit to block a takeover, though a judge ruled in favor of Oracle.

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 double its original offer.

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