Twitter came under attack last week from the brilliant but eccentric billionaire Elon Musk. Musk seeks to buy the company, take it private, and reportedly make significant changes to the social media giant’s policies regarding misinformation or abusive content. The company in turn has adopted a defensive strategy known as a “poison pill.” Here’s a look at how it works:
It is daunting to get into the mind of Elon Musk, reputedly the world’s richest man with an estimated fortune of $270 billion. But one thing is certain: where Musk ventures, drama follows. Earlier this month in a characteristically late SEC filing, the mercurial entrepreneur disclosed that he had amassed a 9% stake in Twitter. The company extended an invitation for him to join the board, which Musk promptly accepted. Then declined. Then announced a hostile takeover bid for the entire enterprise. Twitter’s management responded to the assault in the tradition of General Anthony McAuliffe when confronted with the German demand for his surrender at Bastogne: nuts. The company announced the adoption of a “shareholder rights plan”, colloquially referred to as a poison pill, aimed at fending off Musk’s attack and possibly giving company management time to seek another, more compatible suitor
In essence, the move seeks to block a hostile takeover by making it prohibitively expensive. In its basic form a poison pill defense is triggered when a particular shareholder acquires more that a stated percentage of ownership. Once this threshold is breached, the company offers additional shares to all other outstanding shareholders at a substantial discount, perhaps as much as half off. All shareholders, that is, except the one attempting the takeover. Flooding the market with a tidal wave of new shares dilutes the value of existing holdings, substantially reducing the value of the hostile bidder’s stake and their ownership percentage. While Twitter has not announced all the details, they have stated that the acquisition of 15% or more by Musk or any other buyer would trip the wire and set off the dilution plan.
This type of defense originated in the early 1980s in response to a wave of hostile takeovers by a notorious group of “corporate raiders” including Carl Icahn, T. Boone Pickens and Ronald Perelman. These raiders utilized junk bonds to leverage a company’s own assets to gain control, often saddling the firm with insurmountable debt after securing their own substantial compensation. In response, an attorney named Martin Lipton devised a clever countermeasure that could be deployed by management to defend against an attacker, which was dubbed a “poison pill” by the Wall Street Journal in a reference to the cyanide capsules reputedly carried by cold war era spies. The legality of the maneuver was upheld in a 1985 case in which Unocal Oil successfully defended itself against a hostile takeover attempt by T. Boone Pickens’ Mesa Oil.
With the wide adoption of the poison pill defense and the collapse of the junk bond market, hostile corporate takeovers declined substantially during the early 21st century and less common today, which makes Musk’s gambit all the more intriguing.
Mr. Musk is already engaged in a running gun battle with the Securities and Exchange Commission over his previous abuse of Twitter to allegedly manipulate the value of Tesla stock. In 2018, he tweeted his intention to take Tesla private and stated that the funding had been obtained. While Tesla’s stock spiked sharply on the report, the SEC and a Federal Judge ruled that the claim was false, and Musk entered into a consent decree with the SEC to tone it down. Needless to say, the volatile founder of Tesla and SpaceX has flouted the agreement and amped up his hostile barbs against the very regulator that will ultimately oversee any transaction involving Musk’s ownership of Twitter. He certainly loves the high wire.
Historically, the poison pill defense has proven quite effective, but Musk is loaded and clearly delights in the attention and could decide to see it through. Another possibility is the emergence of a friendlier offer from a different buyer, in which case Twitter could choose to cancel the poison pill. In any event, the ensuing battle is likely to be a spectacle worth tweeting about.
Christopher A. Hopkins is a charter financial analyst in Chattanooga.