Unlock Your Wealthier Future Today
We've been selecting winning stocks for 10 years. Get your investing life on the fast track now with our completely free, high-performing stock.
What Is Going On Between Elon Musk and Twitter?
Now that Twitter looks to accept a buyout offer from Elon Musk, despite using a "poison pill," what could happen next?
April 25, 2022

This article can be found in the MyWallSt App, alongside an audio companion. Sign up today for a free account and get access to dozens of expertly written articles and analyst opinion pieces every month.

Today's Insight was intended to be an in-depth explainer on shareholders rights plans -- or "poison pills" as basically everyone calls them these days. However, in researching the piece, I discovered that Matt Levine (who used to work for the law firm that invented poison pills) had done a far more detailed and erudite write-up for Bloomberg than I could. 

However, if, for some reason, you don't like Matt Levine or have hit your monthly free article limit on Bloomberg, read on for my (now) brief explainer and a few thoughts on where this leaves Twitter going forward. 

Shareholders Rights Plans

As we all know by now, Twitter has attempted to fend off a buyout offer from Elon Musk using what's known as a poison pill. 

From The New York Times:

On Friday, Twitter countered Elon Musk's offer to buy the company for more than $43 billion with a corporate tool known as a poison pill, a defensive strategy familiar to boardrooms trying to fend off takeovers but less familiar to everyday investors.

This defense mechanism was developed in the 1980s as company leaders, facing corporate raiders and hostile acquisitions, tried to defend their businesses from being acquired by another enterprise, person or group.

Poison pills are not uncommon in the world of finance, though this is probably the most high-profile example in recent times due to the players involved. They can come in many forms but the basic premise is that they empower the board of directors to issue new shares in order to prevent someone acquiring the company without their approval. 

In this case, Elon Musk has acquired roughly 9% of Twitter. The board of directors made the very clever decision to offer Musk a board seat. This would have meant that Musk had certain fiduciary responsibilities to the shareholders and came with an agreement not to acquire more than 15% of the business. Musk first accepted this offer and then rejected it a week later -- either because he didn't understand the restrictions that would have been imposed on him, or because he simply changed his mind, or because he was using it as cover to amend some questionable legal documents. 

Fearing that Elon would now try to acquire more shares and eventually try to buy the company outright without the board's involvement, they have adopted a poison pill. What this boils down to is that if Musk were to acquire more than 15% of the company, the board will issue new shares to shareholders (excluding Musk), therefore diluting his shares. 

I won't get into the exact language that has been used in this move - It obviously involves some reference to "4/20" (cause that's how business works these days). The practical implication is that if Musk were to acquire more than 15% of the company, more shares would be issued at a discount, or even for free, and suddenly Musk would only own 7.5% and would have lost a lot of money. 

If you're thinking of buying Twitter shares based solely on this happening, please don't. It doesn't impact the value of the shares in any way. It's basically like a stock split for everyone except Musk. Also, it's not going to happen. Poison pills are so effective that just the threat of them is enough to deter any hostile action...



The Home of Successful Investing.

© 2024 MyWallSt Ltd. All rights reserved.


Services

Content

Social

Company

Support

Resources


This website is operated by MyWallSt Ltd (“MyWallSt”). MyWallSt is a publisher and a technology platform, not a registered broker-dealer or registered investment adviser, and does not provide investment advice. All information provided by MyWallSt Limited is of a general nature for information and education purposes, and you should not construe any such information as investment advice. MyWallSt Limited does not take your specific needs, investment objectives or financial situation into consideration, and any investments mentioned may not be suitable for you. You should always carry out your own independent verification of facts and data before making any investment decisions, as we cannot guarantee the accuracy or completeness of any information we publish and any opinions that we publish may be wrong and may change at any time without notice. If you are unsure of any investment decision you should seek a professional financial advisor. MyWallSt Limited is not a registered investment adviser and we do not provide regulated investment advice or recommendations. MyWallSt Limited is not regulated by the Central Bank of Ireland. MyWallSt Limited may provide hyperlinks to web sites operated by third parties. Your use of third party web sites and content, including without limitation, your use of any information, data, advertising, products, or other materials on or available through such web sites, is at your own risk and is subject to the third parties' terms of use.