Understanding the ‘Poison Pill’ Defense Strategy Used by Twitter Against Elon Musk’s Takeover Bid

When a company faces a hostile takeover attempt, it can implement various strategic measures to prevent or slow down the hostile party's actions. These measures are collectively known as a 'poison pill' defense. In this article, we delve into the specifics of the 'poison pill' strategy employed by Twitter directed against Elon Musk's takeover bid.

What is a 'Poison Pill' Defense?

A poison pill defense, officially known as a shareholder rights plan, is a legal maneuver designed to make a company more unattractive or extremely expensive for a hostile party trying to acquire it. Essentially, it creates barriers that discourage or distastefully affect the acquiring party, thereby thwarting or complicating their efforts to acquire the target company.

How ‘Poison Pill’ Strategies Work

The mechanism behind a poison pill strategy is straightforward. When a company is threatened with a hostile takeover, it can trigger a rights issue, giving existing shareholders the option to buy more shares at a significantly lower cost. This dilution of ownership makes the acquisition much more costly and complex for the hostile party. For example, if a company issues additional shares, the percentage of ownership that an acquirer needs to acquire increases dramatically. This can render the acquisition option financially impractical or unfeasible.

Twitter’s Usage of the Poison Pill Strategy Against Elon Musk

In the case of Twitter, the company decided to adopt a poison pill strategy to prevent Elon Musk's acquisition. Following Musk's proposal to buy Twitter for $54.20 per share, the company took a decisive action to thwart his efforts.

Twitter initially offered Musk a seat on the board on the condition that he would not increase his stake in the company beyond 15%. However, when Musk refused, Twitter adopted a poison pill that limits his stake to no more than 15%. This strategic move was a response to Musk’s already substantial ownership, which he reported to be over 9% of the company's shares.

How the Poison Pill Makes the Acquisition Difficult

The poison pill defense works by introducing additional shares, which makes the acquisition much more expensive for the hostile party. If the hostile party wants to increase their stake, they must acquire these newly issued shares, increasing the overall cost of the acquisition. For instance, if a company already owns 10% of the shares and faces a hostile bid, issuing an additional 10% in shares would make it de facto impossible for the bidder to increase their stake beyond the 20% mark (assuming they acquire all newly issued shares).

Conclusion

Companies like Twitter often use poison pill strategies as a last resort to protect themselves from hostile takeovers. These measures can be effective in making the acquisition process more challenging and costly for the hostile party, thereby providing time for the company to explore alternative options or to reevaluate the situation.

By understanding the mechanics and applications of a poison pill strategy, both investors and companies can better navigate the complexities of hostile takeovers and corporate defense mechanisms.