Why has Twitter underperformed the market?

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?

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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…

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