Elon Musk has extended an offer to buy Twitter.
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Elon Musk’s pursuit of Twitter over the last few weeks has thrust some vintage, 1980s corporate vocabulary back into the limelight. The billionaire entrepreneur and CEO offered to buy the company outright for $43 billion. Twitter is resisting the attempt at a hostile takeover by employing a poison pill strategy.
Earlier this month, Musk filed a disclosure with the US Securities and Exchange Commission stating he had acquired a 9.2% stake in Twitter and may consider increasing his stake, driving rumors that he was interested in acquiring the social media platform.
Twitter then offered Musk a seat on its board of directors, under the condition that his ownership stake of Twitter would remain below 14.9%. But on April 10, Twitter CEO Parag Agrawal tweeted that Musk had declined that offer. A few days later, Musk filed another disclosure with the SEC revealing that he’d offered to purchase Twitter in a $43 billion takeover
. His “best and final” offer included a proposal to purchase the company’s stock at a price of $54.20 per share — a premium of 38% over the previous day’s closing price.
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Shortly after that, Vanguard Group, the world’s second-largest asset manager, upped its ownership stake in Twitter to more than 10%, making it the top shareholder. And on April 15, Twitter unveiled its poison pill plan in response to all this activity: adopting a shareholder rights plan to dilute the stake of anyone who acquires 15% of Twitter or more in a transaction not approved by the board. All this is being done in an attempt to prevent a hostile takeover. Sounds dramatic. We break down exactly what it all means below.
What is a hostile takeover?
Usually, when one company buys another, it’s done with the consent of both companies’ ownership or management. When a company — or individual, in Musk’s case — tries to forcibly take control of another company, that’s called a hostile takeover. If Twitter’s board and management decide that they don’t want to sell, Musk still has options. He can accumulate additional shares on the open market, since Twitter is a public company, or win a sufficient number of shareholder votes to approve a takeover.
A hostile takeover is often the outcome of activist investing, wherein a shareholder (or group of shareholders) feels that a company is being mismanaged or isn’t fulfilling its potential in the market, leading to a lower share price. Musk, on the other hand, has said that his interest in Twitter is primarily to protect free speech in its virtual “public square.” (It should be noted that the First Amendment guarantees of freedom of speech apply specifically to the government. Companies like Twitter are allowed to make rules about what can be posted on their services.)
What is a poison pill?
Though it sounds macabre, “poison pill”refers to a corporate tactic used to thwart an unwanted takeover. Essentially, the targeted company — Twitter, in this case — issues a new tranche of discounted shares to current non-“hostile” shareholders in an attempt to dilute the ownership stake of the “hostile” party, in this case Elon Musk.
The poison pill maneuver was engineered by corporate law firms in the 1980s, designed to shield a client company from unwanted acquisition by increasing the number of shares needed for a prospective takeover. The poison pill usually was considered a last-ditch effort to prevent a takeover because it dilutes value for a company’s shareholders, and the collateral damage incurred makes a potential acquisition more difficult and expensive.
Twitter’s poison pill involves what’s called a shareholders rights plan. For the next year, if any person or group acquires a 15% portion of the company — whether Musk, Vanguard or an unexpected contender — shareholders will be allowed to purchase new, discounted shares to dilute the holdings of the hostile party.
What happens when a company goes private?
Musk has made clear that if he gains control of Twitter his intention is to take the company private, as outlined in a letter sent to Bret Taylor, chairman of Twitter’s board of directors. That means Twitter would pay its existing shareholders a set price for each share they hold — according to Musk’s tender offer, $54.20 per share. As a part of this process, Twitter stock would no longer be traded on public exchanges.
Musk tweeted that he “will endeavor to keep as many shareholders in privatized Twitter as allowed by law.” This suggests he would consider accommodating some financial structure allowing existing shareholders to remain invested in some way if he is successful in privatizing Twitter. Musk referred to a similar arrangement when he discussed taking Tesla private in 2018 at $420 per share.