Poison Pill: The Anti-Takeover Strategy Twitter is Using to Stop Elon Musk

It helps block an investor from accumulating a majority stake

Usually, takeovers are friendly and can be conducted smoothly. But sometimes, takeovers are hostile in nature, and a company that doesn’t want to be taken over tries every trick to avoid the same. The latter is the case with Elon Musk’s idea of taking over Twitter. To stop it, Twitter has adopted a poison pill plan. Read on to know more about this unusual tactic.

The Poison Pill

Also known as the shareholder rights plan, the poison pill plan usually works for companies that don’t want to be taken over. It helps block an investor from accumulating a majority stake in an organization. To dodge Musk’s takeover plans, Twitter adopted the Poison Pill plan on April 15, 2022, shortly after the Tesla CEO shared his takeover offer in a Securities and Exchange filing.

 

The History

In the early 1980s, poison pills were developed as a defence tactic against corporate raiders to, you guessed it, poison their takeover efforts. It is a sort of reminiscent of the suicide pills that spies supposedly swallow if the enemy captures them. Though there are many variants of poison pills, generally, it includes increasing the number of shares to dilute the bidder’s stake and ensure they suffer a considerable financial loss.

In the case of Twitter, the poison pill means that if a shareholder accumulates a 15% stake without the consent of the board of directors, other stakeholders of the company will get the right to buy additional shares at a discount. So, they will be diluting the 9.2% stake bought by Musk recently. Most poison pills have an expiry date. The one adopted by Twitter to thwart Musk has an expiry of one year.

 

The Effectiveness

In addition to Twitter, other companies that have used poison pills in the past include Netflix, Papa John’s, Avis Budget Group, and JCPenney. In 2019, over 100 companies used this tactic to avoid hostile takeovers.

 

The Argument

Though the poison pill strategy is effective, it’s not foolproof. A bidder can argue that the board isn’t acting in shareholders’ best interest and appeals directly to them via a tender offer or might go for a proxy offer. Musk might adopt these strategies too. Will Musk succeed in acquiring Twitter?

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