Twitter’s board unanimously voted to adopt a “poison pill” on Friday in an effort to prevent billionaire Elon Musk from taking over the company.
The poison pill is a strategy that can help block companies from being acquired in hostile takeovers. It allows the market to be flooded with new shares should an investor decide to buy up more than a preset percentage of a company’s stock.
In Twitter’s case, Musk had offered to purchase the popular social media company for $54.20 per share in cash, which would amount to an approximately $43 billion deal. The offer is a 38% premium over the closing price on the day before news broke that Musk had bought up 9.6% of the company and an 18% increase from Wednesday’s closing price.
Twitter’s board of directors, led by Chairman Bret Taylor and CEO Parag Agrawal, essentially rejected the offer and adopted the poison pill as a means to curb Musk’s ambitions to control the company and take it private.
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Under the board’s short-term shareholder rights plan adopted Friday, if Musk, or another investor, acquires more than 15% of the company stock without the board’s approval, other existing shareholders would be given the right to buy up Twitter shares at a discount, something that would dilute Musk’s ownership interest and make it more difficult, and costly, to wrest control of the company.
“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,” Twitter said in a press release.
Investors also appear ever more skeptical about Musk’s ability to follow through on his goal of taking the company private. Twitter’s stock has been dropping in a sign that investors don’t see Musk’s plan to purchase the social media company for $43 billion as a likely scenario.
Earlier this month, when Musk first announced he had acquired enough stock, more than 9%, to become Twitter’s largest shareholder, Twitter’s stock popped by an enormous 27%. Investors felt as though the purchase signaled that Musk would join the board and work to transform the company, something they saw as profitable.
And then Musk took the surprising step of trying to purchase the entire platform.
Twitter’s stock fell 1.7% on Thursday after the plot to turn Twitter private was announced. On Friday, after Twitter adopted the poison pill, the stock fell another 1.7% to $45.08. The declines show that investors see the odds of a buyout as unlikely.
Musk has also hinted that he could retaliate against the company if his plan to purchase it doesn’t work out. In his letter announcing the offer, the Tesla founder said he would “need to reconsider my position as a shareholder” should the proposal fall through. If Musk were to dump his 9.6% stake, it would undoubtedly cause Twitter’s value to plunge, leaving the board in a precarious position.
Betting on the plan falling apart, analysts at financial services giant Stifel downgraded Twitter’s stock to sell after Musk’s plan was announced. They concluded that the company is now staring down a “full-blown Elon circus.”
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Another obstacle is Musk’s ability to raise funds for the cash purchase. While Musk is the world’s wealthiest person, with a net worth of about $265 billion, the vast majority of that worth is tied up in Tesla and SpaceX.
In order to pay for the purchase, he would have to offload stock, and face a steep capital gains tax bill, or borrow off the value of his Tesla shares, although banks might be hesitant to lend such an enormous amount that is secured by just a single company’s stock.
