Twitter does not want to become a toy for the richest person in the world.
So on Friday it turned to a tried-and-tested institutional defense mechanism invented in the 1980s – the heyday of the company’s bomber – to prevent a potential takeover attempt by Elon Musk and the buyout of its board of directors for a while.
The mechanism, known as a poison pill, has a simple intent: to make it less palatable for a potential buyer to pursue a target company if the buyer accumulates shares above a certain threshold. In Twitter’s case, if Mr. Musk buys more than 15 percent of the company, Twitter will flood the market with new shares that all shareholders except Mr. Musk can buy at a discount.
This will immediately dilute Mr. Musk’s stake and increase the cost of buying the company. Mr. Musk currently owns just over 9 percent of Twitter’s stock.
Twitter said its plan will only be in place for one year. The tool won’t prevent the company from having conversations with any potential buyer, and it will give it more time to negotiate a deal that Twitter’s board believes better reflects the company’s value.
The strategy “doesn’t mean the company will be independent forever,” said Drew Pascariella, senior lecturer in finance at Cornell University. “It just means that they can effectively fend off Elon.”
Two people close to the company said Twitter is considering whether to invite others to bid. If it decides to prosecute the buyers, Silver Lake, a private equity firm that already owns a large stake in Twitter, may be possible, the people said. Silver Lake, the technology-focused buyout fund, has more than $90 billion in assets under management, and the managing partner there, Egon Durban, is a member of Twitter’s board of directors.
Silver Lake has come to the rescue of Twitter before. In 2020, when Elliott Management, an activist investor, accumulated shares in Twitter and wanted to make changes, Silver Lake helped the parties reach a compromise. As part of the deal, Silver Lake invested $1 billion in Twitter.
But Silver Lake also agreed at the time not to acquire more than 5 percent of the company, so Twitter would have to waive the so-called hold agreement before it could accept any offer from Silver Lake. Nor is it clear whether Silver Lake, which has its own history with Mr. Musk, having worked on his failed efforts to make Tesla private, will offer a deal or have the financing to do so on its own.
Silver Lake declined to comment.
Reuters has reported that at least one other private equity firm, Thoma Bravo, is considering a potential bid for Twitter, a person familiar with Thoma Bravo confirmed.
Poison pills have been around for decades. Attorney Martin Lipton, co-founder of Wachtel, Lipton, Rosen and Katz, invented this gambit, also called a shareholder equity plan, in 1982. It was a way to bolster the company’s defenses against unwanted takeovers by so-called corporate raiders. Like Carl Icahn and T-Bone Pickens.
They have since become part of the company’s toolkit in America. Netflix adopted a poison pill in 2012 to prevent Mr. Icahn from buying its stock. Papa John’s used one against the pizza chain’s founder and CEO, John Schnatter, in 2018.
Investors rarely try to get around a toxic pill by buying shares beyond the company’s cap, according to stock experts. Someone said it would be “financial ruin,” even for Mr. Musk.
But Mr. Musk, who has a fortune of more than $250 billion and is the CEO of Tesla and SpaceX, rarely sets foot on precedent. He announced his intention to acquire Twitter on Thursday, announcing an unsolicited bid worth more than $40 billion. In an interview at a TED conference later that day, he addressed Twitter’s moderation policies, which govern content shared on the platform.
Musk said Twitter is “the actual town square,” adding that “it’s really important for people to have the reality and the perception that they are able to speak freely within the limits of the law.” Twitter currently bans many types of content, including spam, threats of violence, sharing of private information, and coordinated disinformation campaigns.
Mr. Musk argued that making Twitter private would allow more freedom of expression to flow onto the platform. “My strong a priori feeling is that having an extremely reliable and broadly inclusive public platform is critical to the future of civilization,” he said during the TED interview. He also insisted that the algorithm Twitter uses to rank its content, determining what hundreds of millions of users see on the service each day, should be public for users to sift through.
Musk’s concerns are shared by several Twitter executives, who have also pushed for more transparency around his algorithms. The company published internal search He turned around bias in his algorithms and funded an effort to create an open and transparent standard for social media services.
Twitter said Friday that its board of directors, which includes Jack Dorsey, co-founder of Musk-friendly Twitter, voted unanimously to approve the shareholder equity plan. People familiar with the matter said Twitter is working with two Wall Street banks, Goldman Sachs and JPMorgan Chase, while balancing its options. Mr. Musk works with Morgan Stanley.
Mr. Musk said at the TED conference that if Twitter’s board rejects his offer, he has a plan B, though he hasn’t shared it. Already, analysts said his bid — which offers a price per share much higher than the current share price but well below its peak last year — could reduce the company’s value and may need to raise it. They also raised concerns about Mr. Musk’s ability to raise funds together.
Edward Rock, a professor of corporate governance at New York University School of Law, said Mr. Musk could challenge the toxic pill in court, but that it was unlikely to work.
The first question would be: Does this offer pose a threat to Twitter and contributors? “There are many, many arguments they can make that it is a threat,” said Mr. Rock.
Mr. Musk appears to be preparing for a long-running battle. When he notified the board of his offer on Wednesday, he said it was his “best and last offer” and that he would “reconsider my position as a shareholder” if it was turned down.
But at a TED conference on Thursday, he admitted he doesn’t like to lose. Later in the day, he moved to his favorite social media platform: “Making Twitter private at $54.20 should be up to the shareholders, not the board of directors,” he tweeted, along with a yes/no poll.
Making Twitter private at $54.20 should be up to shareholders, not the board
– Elon Musk April 14, 2022