Poison Pill: What is supposed to be Twitter’s weapon against Elon Musk’s takeover bid

Twitter is trying to thwart billionaire Elon Musk’s capture with a “poison pill” – a financial device that companies have been using for decades against unwanted suitors.

What to do with poison pills?

The ingredients of each poison pill vary, but they are all designed to give corporate boards the option to flood the market with so much freshly made stock that a takeover becomes prohibitively expensive. The strategy became popular in the 1980s when companies held in public by corporate raiders like Carl Icon – now often referred to as “activist investors”.

Twitter did not release details of its poison pill on Friday, but said it would provide more information in an upcoming filing with the Securities and Exchange Commission, which delayed the company from closing public markets on Friday.

The San Francisco Company’s plan will be triggered if a shareholder deposits 15 percent or more of the shares. Musk, known as the CEO of electric car maker Tesla, currently owns about 9 percent of the shares.

Can a poison pill be the talk of the town?

While they are supposed to help prevent an unwanted seizure, poison pills often open the door to further negotiations that could force a bidder to sweeten the deal. If a high price is understandable to the board, then a poison pill can simply be thrown aside and the resentment it aroused clears the way for the sale to be completed.

True to form, Twitter kept its door open, insisting that its poison pills would not prevent its board from “joining parties or accepting acquisition offers” at high prices.

Taking a poison pill often leads to lawsuits alleging that a corporate board and management team are using their strategy to keep their jobs against the best interests of shareholders. These complaints are sometimes filed by shareholders who think a takeover offer is fair and want to cash out at that price or the buyer is interested in purchasing.

How did Elon Musk react to Twitter’s announcement?

Musk, a great Twitter user with 82 million followers, had no immediate reaction to the company’s poison pills. But on Thursday he indicated he was ready to fight a legal battle.

“If the current Twitter board acts against the interests of shareholders, they will violate their fiduciary duty,” Musk tweeted. “The responsibility that they will take on will be the Titanic in shape.”

Musk has publicly stated that his $ 43 billion (approximately Rs 3,28,250 crore) bid is his best and final offer for Twitter, but other corporate suitors have made similar statements before finally making progress. With an estimated fortune of $ 265 billion (approximately Rs. 20,22,860 crore), Musk seems to have enough deep pockets to expand its offer, although it is still working on how to finance the proposed purchase.

How has this defense worked in the past?

Takeover feuds often escalate into gamesmanship, which includes poison pills and other strategies designed to make shopping more difficult. This is one of the biggest and most drawn-out takeover dances in the history of Silicon Valley.

After the business software maker Oracle made an unsolicited $ 5.1 billion (approximately Rs 38,930 crore) offer to its small rival PeopleSoft in June 2003, the two companies have been battling each other for the next 18 months.

As part of its defense, PeopleSoft has not only adopted a poison pill that allows the board to flood the market with more shares, it is known as a “consumer assurance program.” If the software license is sold by PeopleSoft within the next two years, it creates an estimated $ 800 million (approximately Rs. 6,100 crore) liability for an acquiring company.

PeopleSoft got another helping hand when the US Department of Justice filed a no-confidence motion to block a takeover, although a judge ruled in favor of Oracle.

Although the company ended up selling to Oracle, People’sSoft’s defense strategy paid off for its shareholders. Oracle’s final purchase price was 11.1 billion (approximately Rs 84,730 crore) – more than double its original bid.

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