A Poison Pill: Musk Plays the People Versus the System Against Twitter

Author: Minh Phan, Graphics: Carol Lu

The BRB Bottomline

Elon Musk announces his intention of buying Twitter at a price of $43 billion as a way to restore freedom of speech and bring out the full potential of Twitter. Following this hostile action is Twitter’s announcement of a poison pill defense tactic.

Disclaimer: This article was written in April 2022 and further developments in the Musk-Twitter saga have unfolded since then. This article still provides a great insight into the early events that led us to where we are.

Elon Musk is known as the richest individual in the United States and the world. He is the founder and CEO of many technological innovative companies, such as Tesla, SpaceX, Neuralink, The Boring Company, and PayPal. He was neither Twitter’s founder nor a member of its board, but recently Elon is in the battle against Twitter. People often remember Elon’s famous tweets surrounding cryptocurrency, and some of his posts even influenced the crypto market. Yet, recently, all news headlines have his name alongside Twitter. The war began when he announced his interest to own a social media platform and his desire to buy Twitter. This forced Twitter to throw a hail mary, the initiation of a poison pill.

Why and How Did The War Begin?

At the beginning of April, the tech billionaire questioned the free speech value of Twitter and a few days later bought more than 9 percent of the company, making him the largest shareholder of Twitter. The day after his unexpected purchase, Twitter’s stock price soared by 30% to roughly more than $50 per share. 

There is no smoke without fire. Many investors predicted this day would come when Elon openly criticized the social media company on its own platform. The conflict began when he declared to Twitter’s board chair, Bret Taylor, that he wants to unlock Twitter’s “extraordinary potential” by taking the company private. Elon believes that “the company will neither thrive nor serve this societal imperative in its current form” as outlined in a copy of the letter in an SEC filing. Attempting to settle a peaceful agreement, Twitter and its board of directors promised a board seat for Elon Musk and agreed to raise targets for user and revenue growth. Elon, however, turned down the offer right away and exposed these “secret meetings” to the public via Twitter. Elon announced his interest in buying the company as a whole, not just owning part of Twitter. Later, he even published a short message he sent to Chairman Bret Taylor, forcing Twitter to play its final card, a poison pill.

Figure 1: Elon Musk brings the issue against Twitter on Twitter by asking for the appropriate action of the board of directors.

What is a Poison Pill – or “Shareholder Rights Plan”?

A poison pill is famously known as a defense tactic used by a target company to prevent or discourage hostile takeover attempts. In this case, the target company is Twitter and the hostile figure is Elon Musk. This “pill” allows shareholders to purchase additional shares of the company at a discounted price to dilute the ownership of the new, hostile party. 

The defense tactic has been around since the 1980s and was developed by a New York-based legal firm Wachtell, Lipton, Rosen, and Katz. The name describes the poison pills that spies used to carry to avoid questions from interrogators when being captured. It was frequently used in the 1980s to prevent an acquiring company from buying too much ownership in the potential target and dominating over shareholders.

Why does a company want to use this? Just like its name suggests, a poison pill is something that is difficult to swallow and dangerous to consume. It is a means to make the company less attractive to potential acquirers. It also raises the cost of acquisitions and puts a big disincentive to prevent a complete takeover. 

Two Types of Poison Pills

As simple as the poison pill sounds, there are two different approaches when initiating this defense tactic – the flip-in and flip-over. Of the two types, the flip-in poison pill is commonly known and used more often in the investment scene.

Flip-in Approach

The flip-in tactic is widely used by the board of directors as a way to defend their company from being fully bought by another party. It grants current shareholders the right to purchase additional shares at a discounted price. Even though shareholders will gain instantaneous profits from the transaction, the tactic essentially dilutes the value of the number of shares already purchased by the acquiring entity. It is the right given to shareholders, besides the acquirer, before the takeover and is triggered when the hostile figure acquires a certain threshold of ownership of the company. 

In the case of Twitter and Elon Musk, this right will be activated when Elon Musk surpasses 15% ownership of Twitter. At that point, every shareholder, excluding Elon, is entitled to buy new shares at a discounted rate. As more shareholders purchase additional shares, the company’s interest will be more diluted, making the bid more expensive. As more shares are purchased in the market, the value of the shares held by the current acquirer will be less valuable, making the takeover more difficult. On the bright side, if the bidder is aware of the new strategy, they may not pursue the takeover. However, with enough capital, the acquirer still can bypass this defense and accept a higher price for the company. Though it sounds like an unconventional strategy, this strategy is publicly available in the company’s bylaws.

Flip-Over Approach

Just like the name suggests, this second poison pill takes the matter to the other side by flipping the table over. Instead of allowing the target shareholders to purchase the company’s own shares, the flip-over poison pill gives those shareholders the ability to buy the acquiring company’s shares at a deeply discounted price. At the target company, for example, shareholders can have the right to buy the stock at a three-for-one rate, heavily diluting the equity of the acquiring entity. This tactic can prevent the hostile company from taking over in fear of a lower valuation post-acquisition. However, in our case, Elon Musk doesn’t use his current companies to buy Twitter in the normal case of mergers and acquisitions. Instead, he is solely responsible for the purchase of Twitter through his individual assets. This means he has to sell his ownership stake at Tesla or SpaceX to have enough capital for the bid. It is the battle between Elon and Twitter, not Tesla or SpaceX against Twitter. Flip-over approach is not appropriate or even applicable in this case, but worth noting nonetheless.

Potential Disadvantages of Poison Pill Tactics

As easy and good as it sounds for the targeting company to deploy this last defense tactic against the hostile takeover, there are some potential downsides we should observe when a firm announces this action. There are three major potential drawbacks of poison pills:

  1. By initiating this defense strategy, it paints Twitter as a company with heavy and aggressive defenses, which will discourage investors from investing and buying into the company.
  2. Buying additional shares at a discount rate will drive down the value of the company and adversely impact the shareholders’ value.
  3. This tactic merely makes the bidding more expensive. If the acquiring entity is very tough, this strategy will not have any influence on them and would negatively impact the target company only. 

Other Perspectives

Just like any war, there are two sides to the conflict. Due to Elon’s strong support for “free speech” and opposition to Twitter’s control of any content deemed harmful to society, people fear that his libertarian approach will erase this control system. This means that content influencing society negatively will float around the media and can cause harm to the community. This side still supports free speech, but there should be a limitation on it. Just like the conventional rule of not yelling ‘fire’ in a movie theater, publishing harmful content should be met with some degree of regulation on the internet. 

On the other hand, Elon’s supporters believe that the acquisition of Twitter can bring an end to any type of censorship happening on the social media platform. Monica Crowley, former assistant secretary of public affairs at the Treasury Department under Trump, supports Elon’s action and tweets: “now that [Elon Musk] is Twitter’s largest shareholder, he should demand the end of political censorship, company-wide reform, and the reinstatement of President Trump.”

Plan B For Elon Musk

The current question for us is, what would Elon Musk do if his offer doesn’t go through? In his recent letter to the board chair, Elon announced that he would “reconsider [his] position as a shareholder” if his offer to buy Twitter isn’t successful. He mentions dumping all the shares he bought from Twitter, which will tank the firm’s stock price dramatically. This will give the board the legal cover to refuse the offer but at the cost of plummeting share prices. 

On April 22nd, 2022, Elon had an interview at the TED conference, where he hinted at a backup plan in the case of an unsuccessful bid to buy Twitter. However, the exact next-step action of Tesla’s CEO is not disclosed. During the conversation with TED, Elon reiterated his support for an open Twitter. He said, “Well I think it’s very important for there to be an inclusive arena for free speech.”

Take-Home Points

  • Jokingly tweeting his takes on cryptocurrency, his companies’ performance, and his criticism against Twitter’s business model, in early April of 2022, Elon Musk announced his intention of fully taking over Twitter.
  • Twitter’s board of directors offered Elon a seat on their board, but the offer was turned down by the tech billionaire, who opted for acquisition instead.
  • Twitter announced its initiation of the poison pill tactic as a defense for a future potential takeover from Elon Musk after the latter publicly announced his 9% ownership in the company.
  • The remaining question regards Elon’s willingness to surpass the poison pill, as well as his mysterious plan B if his bidding of $43 billion to buy Twitter failed. 

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