Twitter has thrown a roadblock in front of Elon Musk’s hostile takeover bid, adopting a “limited-duration shareholder rights plan”, also known as a “poison pill”, that would make it much more expensive and complicated for the Tesla CEO to take control of the social media network. We take a look at what this plan is that Twitter has brought in to thwart Musk’s bid and what are the options left for the Tesla CEO to complete his takeover.
Poison pill — the nuclear option against a hostile takeover
The method, known as a “poison pill” in the finance world, essentially allows existing shareholders to purchase freshly issued shares in a company at a discount to the trading price, effectively making any possible buyout plan extremely costly and prohibitive for the party planning a hostile takeover.
In this case, the move will prevent anyone from having more than a 15 per cent stake in Twitter by allowing existing shareholders to buy additional shares at a discount. The Twitter board detailed its defence plan to the US Securities and Exchange Commission and put out a statement saying it was needed because of Musk’s “unsolicited, non-binding proposal to acquire Twitter”.
In fact, Musk, who offered to buy Twitter for $43 billion for $54.20/share in cash for a 9.2 per cent stake in Twitter, seems to have been displaced as the largest shareholder in the platform. US registered investment advisor Vanguard Group, on April 8, disclosed that it now owns 82.4 million shares of Twitter, which means 10.3 per cent of the company, according to the most recent publicly available filings with the US Securities and Exchange Commission. According to the filing, the asset-manager increased its stake in the company at some point during the first quarter.
Another high-profile Twitter investor, Al Waleed bin Talal Al Saud — a Saudi royal — has said that Elon Musk’s offer to buy the platform is too low. Al Saud, in a tweet on April 15, rejected Musk’s offer. “I don’t believe that the proposed offer by Elon Musk ($54.20) comes close to the intrinsic value of Twitter given its growth prospects,” the Saudi prince tweeted. “Being one of the largest and long-term shareholders of Twitter, @Kingdom_KHC and I reject this offer.”
A takeover bid is deemed as hostile when a company attempts to acquire another against the wishes of that unit’s management. In the Twitter case, the management is represented by the platform’s executive board which has indicated that it is viewing the Musk offer as “hostile”.
What has Musk’s plan been
Musk has gone back and forth on this. His says that his latest plan is to buy Twitter outright and then take it private “to restore its commitment” to what he calls “free speech”. But his offer, which seemed to have gotten a clear thumbs down from the investors, raises multiple questions, including whether he’s serious in the first place and does he have the funds to do this?
His objective for this move to take over Twitter is also fuzzy, including his promise of ensuring that it lives up to its potential as a “platform for free speech”. Musk insisted on Thursday that his plan was triggered by the realization that “having a public platform that is maximally trusted and broadly inclusive is extremely important for the future of the civilization”.
What stands in the Tesla CEO’s way
Since Musk does not have any presence in the social media space, his proposal to buy Twitter is unlikely to raise any antitrust flags. However, there are still question marks over how he would fund the $43 billion purchase. Bloomberg columnist Matt Levine wrote in an opinion piece that funding the 9.2 per cent buy-in would’ve been much easier given that Musk only just diluted Tesla stocks worth nearly $16 billion. But to finance his purchase of the rest of Twitter’s shares would mean tapping into his remaining $55 billion worth of Tesla shares. There’s also the question of Musk having to clear the SEC hurdles — an organisation that has had run-ins with Musk several times in the past with the regulator prevailing over the billionaire. On Thursday at a TED Event in Vancouver, speaking about his plans to take Tesla private Musk said: “I was told by the banks that if I did not agree to settle with the SEC, they would cease providing working capital and Tesla would go bankrupt immediately…so that’s like having a gun to your child’s head. So I was forced to concede to the SEC, unlawfully”.
Response to the ‘poison pill’
The proposal of Twitter’s board to block Musk from buying the company out could also go either way, given that the billionaire could mobilise a proxy fight with thousands of retail investors backing him in voting the current set of directors out, Levine wrote. Notably, like he did before selling his Tesla stocks, Musk has already conducted a Twitter Poll titled: “Taking Twitter private at $54.20 should be up to shareholders, not the board” with 83 per cent of the 2.9 million participants voting ‘Yes’, with the remaining 17% voting ‘No’. Musk even tweeted: “If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty. The liability they would thereby assume would be titanic in scale”. However, he does recognise the Board’s ability to block the purchase. At the Vancouver event he acknowledged that he might not “actually be able to acquire” Twitter, but said that he has a Plan B if Twitter rejected his offer.
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