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Twitter and the poison pill

Twitter and the poison pill

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Cartoon Elon Musk looking at poison pill with Twitter logo

Price at posting: US$47.26

Twitter Inc (NYSE:TWTR)

ELON MUSK entered the headlines in 2018 after taking a single puff of cannabis on The Joe Rogan Experience podcast. Musk has returned to the headlines in recent weeks but this time the news concerns a single pill.

Elon Musk revealed in regulatory filings (filed eleven days late) that he had acquired a 9.2 percent stake in Twitter. This made Musk Twitter’s largest shareholder. Securities and Exchange Commission (SEC) rules require that an investor notify the SEC when they reach a 5% stake in a public company. By notifying the SEC late, Musk was able to continue to acquire shares in Twitter at an artificially low price and edge towards a controlling interest.

Following the revelation, shares in Twitter increased 25%.

While shareholders may have been jubilant, the Twitter board were weary, fearing that Musk may continue accumulating shares and perhaps try to acquire the company outright without paying an appropriate control premium – the amount above the market price that a buyer must pay to acquire a controlling interest.

The Board’s first strategy was to bring Musk into the fold and offer him a seat on the board. Musk declined and later announced that he wanted to take Twitter private. Musk made an offer to buy Twitter for US$44 billion or $54.20 per share – 420 being a reference to cannabis. 

In response, Twitter announced that it had adopted a ‘poison pill’ – a type of takeover defence aimed at making the target company less attractive to the acquirer. The name comes from the cyanide capsule that spies carried to avoid revealing secrets to their enemies.

What is a ‘poison pill’?

A poison pill is effectively a shareholder rights plans that issues shares on a non-pro rata basis.

Under Twitter’s proposed shareholder rights plan, if any person or group acquires beneficial ownership of at least 15% of Twitter’s outstanding common shares without the board’s approval, other shareholders will be allowed to purchase additional shares at a discount. This increases the number of shares that the acquirer must buy making the deal less attractive.

The plan allows Twitter shareholders to acquire $420 (again, a drug reference) of additional shares at an exercise price of $210.

Musk using cannabis on Joe Rogan Experience podcast

Allowing existing shareholders to buy more stock at a discount is the most common type of poison pill, but there are other varieties.

One variation is an employee share scheme that vests if there is a takeover attempt. This makes it hard to keep key employees as their ‘golden handcuffs’ are released. Another is the Issuance of preferred shares to existing shareholders that are convertible to common shares in the event of a takeover.

The common thread among these strategies is the dilution of the acquirer’s interest in the target company which makes the takeover more expensive.

How come we don’t see this on the ASX?

Poison pills involving a shareholder rights plans are not feasible in Australian takeover deals. The Takeover Panel policies, Corporations Act and ASX Listing Rules combine to prevent this sort of defence.

Non-share issue variants of the poison pill defence can be more useful in an Australian context including:

  • Golden parachute – Provide key management with expensive compensation packages in the event of a takeover.
  • Stagger board elections – Replace one board member per year on a rolling basis to Increase the likelihood that the acquirer will face an unfriendly board.

These strategies are not without their own problems.

Bumbling share price

Twitter has acquiesced and it now appears that the takeover will go ahead. This may be good news for shareholders.

Twitter’s share price has bumbled along for years as Facebook, Instagram, Snapchat and TikTok have added continue to more daily users. Twitter now has 217 million daily users which is far less than Facebook’s 1.79 billion daily users (but 217 million more than Shorting Hat.)

Graph showing decline in Twitter share price and point where Musk reveals stake

“The Rights Plan will reduce the likelihood that any entity, person or group gains control of Twitter through open market accumulation without paying all shareholders an appropriate control premium or without providing the Board sufficient time to make informed judgments and take actions that are in the best interests of shareholders,” the company announced.

It looks as if the Twitter board were buying time and working to protect the control premium. 

Musk has said that he would consider returning Twitter to public markets in a few years.

Shorting Hat