What is Twitter's 'Poison Pill' Plan to Thwart Hostile Takeover Bids?
On Friday, Twitter countered Elon Musk’s offer to buy the company for more than 43 billion dollars with a corporate tool known as a poison pill, a defensive strategy familiar to boardrooms trying to fend off takeovers but less familiar to everyday investors.
What is a Poison Pill?
A poison pill is a maneuver that typically makes a company less palatable to a potential acquirer by making it more expensive and difficult to acquire. This strategy was developed in the 1980s, as company leaders facing corporate raiders and hostile acquisitions tried to defend their businesses from being acquired by another enterprise person or group.
Twitter's 'Poison Pill' Plan
In this specific case, if Elon Musk buys more than 15 percent of Twitter, the company will flood the market with new stock that all shareholders EXCEPT Musk could buy at a discounted price. This effectively dilutes Musk’s existing stake. Essentially, Twitter is trying to make the company less attractive and more expensive to acquire by increasing the cost of a hostile takeover.
Understanding the Strategy
This defense mechanism has its origins in the 1980s during a period when corporate raiders and hostile takeovers were more common. The poison pill is often used as a deterrent to dissuade opportunistic acquirers from attempting a takeover. By making the company more expensive to buy, the threat of a hostile takeover can often be neutralized.
The Current Context
Elon Musk's bid for Twitter is significant, primarily because the company's board has been unable to sustain the market cap that Musk is offering. Some argue that Musk's bid is not hostile; the board has a duty to maximize shareholder value and Musk’s offer may be the best opportunity for them to do so.
The Broader Implications
The use of a poison pill by Twitter raises questions about the nature of corporate takeovers, the role of boards in overseeing such transactions, and the strategic measures companies can take to protect themselves from unwanted acquisitions. This situation is likely to be of interest to both investors and corporate strategists, as it provides a real-world example of how these tools are deployed in practice.
Conclusion
The decision by Twitter to implement a poison pill strategy is a response to the increasing interest from Elon Musk, highlighting the ongoing tension between established corporate structures and individuals seeking to disrupt them. This case underscores the need for companies to have robust defensive measures in place to safeguard their operations and the interests of their shareholders.