Headline: Twitter’s Poison Pill

Date: 4/15/2022

Body:  I don’t know about you, but when I think of a “poison pill” I think back to Romeo & Juliet.  But, this time, that’s not the tragedy unfurling.   In fact, I’m not sure if there is a line between comedy and tragedy on this grand stage where everybody is an actor.  Let’s try to peek behind the curtain.

Just recently, Elon Musk bought a small, yet substantial 9% stake in Twitter.   He’s a billionaire, he can do that.   It secured him a seat on the board and put people on notice that he was very serious.   Now, the play’s afoot.  He, today I think, put in a $43 Billion offer to buy the entire company.  Supposedly he wants Twitter to become more hands-off in its editing, but we’ll see.  In response, the other board members did something extraordinary.   They concocted a poison pill defense against Musk buying the entire company, and this planned defense would be executed if he or another entity acquired more than 15% of the company.  In this procedure, current shareholders can purchase more shares at a discount, and dilute the effect of Musk’s own shares.  Can this work?  Different experts believe different answers.  Per corporate governance expert Edward Rock from the NYU School of Law:

“The poison pill puts a temporary roadblock in front of Musk going forward,”   He goes on to say, “It gives the board a chance to evaluate the bid, whether it makes sense to sell the company, and if they are going to sell the company, whether it makes sense to sell the company to him.”  He opined that Musk could demonstrate his serious intent by either displaying his financing plan or launching a proxy battle with the objective of replacing most of the governing board.  If Musk does challenge the move in court, the governing board will have to explain how their move was in the best interests of the shareholders.  Currently, the board is getting advice from Goldman Sachs, and J.P.Morgan has been identified as a secondary advisor. 

What is a poison pill, and how was this tactic developed?

Let’s step into the Wayback machine and go to the 1980s.   Corporate raiders, would acquire a substantial share of stock, and then use some creative financing to threaten a complete takeover.  If successful, the raider would sell off some divisions, and often fire large swathes of employees to better profits.  Boards across America did seek a defense to this, and found it in the poison pill developed by M&A attorney, Martin Lipton.  In the current mechanism under consideration (the “flip-in”) strategy, current shareholders, with the exception of the raider, would be allowed to purchase shares at a discount.  Shareholders are happy because they can enjoy immediate profits.  The raider is less happy because their shares are now diluted, and the acquisition becomes much more expensive.

Are there Pros and Cons to using the Poison Pill?

Yes, the poison pill is not an easy decision to make.  There are Pros and Cons to this approach

Advantages of the Poison Pill

Preserves a company’s management and governance.The governing board is not dismissed in favor of more favorable (to the acquirer) officers.
Interests of Minority Shareholders are safe.If you are a small shareholder, the offer of a corporate raider can be enticing.
Allows more time to consider the possibility of a more harmonious takeover by a different entity.Perhaps a takeover is the best option.  But a better deal can possibly be had, with a different acquirer.
Brings the acquirer back to the negotiation table.The acquirer might offer better terms when forced to renegotiate.

Disadvantages of the Poison Pill

When shares are offered at a discount, the value of the company falls.This drop in capitalization might entice yet another Raider.
This approach could frighten important foreign investors.Foreigners bring in a lot of capital.   We don’t want to scare them with aggressive business mechanisms.
Non-productive managers could be encouraged to continue to work, and negatively affect productivity.If there is a non-productive manager who smells a takeover, they might be more likely to leave.  If there is a poison pill, they might be more encouraged to stay.
If the Acquirer is successful (and vindictive) this mechanism could negatively affect the new policies.This poison pill will hurt the acquirer.   If they remember this, they could take “justice” upon the backs of the employees with abusive policies.

Are there some examples of successful (or unsuccessful) attempts to do this in the past?

The history of corporate finance is littered with examples of using the poison pill approach.   In brief:

In 2012, Netflix adopted the Poison Pill approach to fend off a 10% owner.
In 2016, Pier 1 Imports used the Poison Pill procedure to fend off a 9.5% owner.
In 2018, Papa John’s Pizza used the Poison Pill approach to fend off a 30% owner.

What will be the role of private equity firms or large companies in all of this?

Good question.   One private equity firm is trying to put together an acquisition financing plan that would rival Musk’s offer.  Other private equity firms appear eager to partner up with Musk.   So, the picture appears to be a little unclear.  There is one firm (Silver Lake) which has had dealings with Musk in the past, and one of the officers is on the Twitter board.   (He did not recuse himself from discussions, so it would seem that their $90 Billion in powder might be kept dry.)    So, stay tuned.

A larger company like Google, Meta and others might also act as a “White Knight” making a bid to rival Musk’s own bid.   The tough issue here is Anti-Trust provisions in the Law.  Dozens of lawyers at many firms are probably racking up huge fees researching how their firms could legally acquire Twitter.   Per Mark Cuban, this is “gonna be interesting.”

The Verdict

In all of this hoopla, it must be remembered that Musk is a master at self-promotion.  He put several rockets into space, and one of his cars is currently touring the galaxy.  He has done many things in the past that seemed to have a sole benefit of self-promotion, and this whole thing could be a continuation of that pattern.  Regardless of this, I have to agree  with Mr. Cuban, because this is certainly “gonna be interesting.”  Besides, he made that comment using Twitter.






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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