In this article you will know everything about ‘poison pills’ as an investment strategy that allows the existing shareholders of a company the right to purchase additional stocks in order to dwindle the interests of a new and hostile buyer.
You need to know from this article that poison pills raise cost of acquisition which discourages the acquiring party from taking over.
Elon Musk’s takeover Plan for Twitter
Elon Musk has launched a $43 billion takeover off for Twitter in April 2022. This bid was regarded as hostile takeover attempt. Musk believes that the social network can be used to connect with his over 81 million followers and suggested that the platform is indispensable to the democratization of his business interests.
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On the 14th of March, Musk outlined his plan to take charge of Twitter as a way to raise business conversations and to prevent transnational misinformation. According to Musk; “my strong intuitive sense is that having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization”.
He stated that, “I don’t care about the economics at all.” The offer to take the company private in a securities filing dated Wednesday for $54.20 a share marks a major escalation in a weeks-long battle by Musk to gain influence at Twitter, following his acquiring a more than 9 percent stake and flirting with a seat on the board. In the filing, he called it a “best and final offer.”
If it is not accepted, he added, “I would need to reconsider my position as a shareholder.” Twitter confirmed in a news release Thursday that it had received a nonbinding proposal from Musk.
The Twitter Board of Directors will carefully appraise the proposal to determine the line of action that it believes is in the best interest of the Company and all Twitter stockholders. The Board’s review of the proposal leads to the use of what we call the poison pills strategy.
What Does Poison Pills mean
A poison pill is a defense tactic utilized by a target company to prevent or discourage hostile takeover attempts.
Poison pills allow existing shareholders the right to procure additional interests at a rebate which will efficiently dilute the ownership interest of a new, intimidating buyer.
It is reasonable that when a company is confronted with the prospect of a hostile takeover by another company, the company’s board will adopt a defensive strategy called a shareholder rights plan.
Such plans discourage a hostile acquisition of the company’s stock above a set maximum benchmark by focusing on diluting the buyer’s stocks with discounted stocks sales to the existing shareholders.
The overall goal is to make stock purchases above the maximum benchmark set-down in the shareholders buying plan discouraging, hence the poison pills becomes a handle for this ploy.
An example of a poison pill defense occurred in 2012, when the board of Netflix, Inc. (NFLX) adopted a shareholder rights plan days after investor Carl Icahn acquired a 10% stake in the company.
The poison pill stated that in the event of any new acquisition of 10% or more, any Netflix merger or Netflix sales or transfers of more than 50% of assets, other shareholders would be able to purchase two shares for the price of one.
Twitter Poison pills
What the Twitter board unanimously settled for to deploy poison pills strategy, which is essentially known as a limited duration shareholder rights plan.
Poison pills give the existing twitter shareholders the option to buy more twitter stocks at a lower price so as to completely neutralize Musk’s takeover bid because the buyer appears to them as pursuing a hostile ownership stake.
What this means is that Twitter is trying to foil billionaire Elon Musk’s takeover attempt with a “poison pill”, a financial device that companies have been wielding against unwelcome prospective investors for so many years.
On Thursday, Musk offered to buy Twitter with the revelation coming just days after the Tesla CEO said he would no longer be joining the social media company’s board of directors. He offered $54.20 per share of Twitter’s stock, calling the price his best and final offer.
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The Twitter’s board is of the firm believe that any acquisition of more than 15 percent of the company’s stock without the board’s approval would trigger a plan to flood the market with shares and thus make a buyout much harder.
Types of Poison Pills
There are broadly two types of poison pills:
Flip-in poison pills
This involves a situation where existing shareholders, except the intending buyer, purchase additional stocks at a discount in order to dilute the prospective buyer’s interests.
Flip-over poison pills
This involves a situation where existing shareholders of a company purchase stocks of the acquiring company after a hostile takeover becomes successful. This will help to deplete the ownership gap of the acquirer.
What Twitter Poison Pills Supposed To Achieve?
Elon Musk currently holds a roughly 9 percent stake in Twitter. The use of each poison pill varies but they are generally designed to give corporate boards an option when confronted with a hostile investor.
Twitter did not disclose the details of its poison pill on as at April 15 2022 but promise to provide more information in a forthcoming filing with the Exchange Authority after the Easter break.
However, reliable information from Twitter indicates that the poison pills are supposed to raise the cost of acquisition above the limit that Elon Musk can accept.
Can A Poison Pill Be A Negotiating Strategy?
Poison pills are generally used to prevent hostile takeover of a company. It however provides a strategic avenue to further negotiate between the parties which may compel the bidder or the shareholders to shift ground.
For instance, if the company’s board thinks that a higher share-price gives them more leverage, then a poison pill can simply be dropped thereby clearing the way for a complete sale.
Statement from Twitter shows that its door is left open by emphasizing that its poison pill will not prevent its board from engaging with parties or accepting an acquisition proposal at a higher price. This implies that the twitter poison pills will open door for negotiation between the board and Elon Musk.
This negotiation can lead to lawsuits on allegations that a corporate board and management team is using the poison pills tactic to keep their jobs by and deliberately undermining the best interests of shareholders.
How Have Poison Pills Worked In The Past?
Oracle Software Company made an unsolicited $5.1 billion offer for its smaller rival PeopleSoft in June 2003. What follows was that the two companies spent about 18 months in court fighting each other.
What is the matter? PeopleSoft did not only adopt a poison pill that authorized the board to flood the market with more shares, it also created what it called a “customer assurance programme.”
The programme promised to pay customers five times the cost of their software licenses if PeopleSoft was sold within the next two years, creating an estimated liability of up to $800 million for the acquiring company, Oracle.
Even though the company ended up selling to Oracle, PeopleSoft’s poison pills strategy paid off for its shareholders because Oracle’s final purchase price was $11.1 billion which is more than twice its original bid.
Musk’s Reactions to the News
Musk did not make any official reaction to this development. His over 81 million followers are eager to get his official reaction to twitter’s poison pills. But on April 14 2022 he indicated he was ready to institute a lawsuit.
According to Musk, “if the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty, and the liability they would thereby assume would be titanic in scale.