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Explained: What Twitter’s ‘poison capsule’ is supposed to do

Twitter is attempting to thwart billionaire Elon Musk’s takeover try with a “poison capsule” — a financial device that companies have been wielding against unwelcome suitors for decades.

WHAT ARE POISON PILLS SUPPOSED TO DO?

The ingredients of each poison pill vary, but they’re all designed to give corporate boards an option to flood the market with so much newly created stock that a takeover becomes prohibitively expensive. The strategy was popularized back in the 1980s when publicly held companies were being stalked by corporate raiders such as Carl Icahn — now more frequently described as “activist investors.”

Twitter did not disclose the small print of its poison capsule Friday, however stated it will present extra data in a forthcoming submitting with the Securities and Exchange Commission, which the company delayed as a result of public markets have been closed Friday.

The San Francisco company’s plan will probably be triggered if a shareholder accumulates a stake of 15% or extra. Musk, greatest often known as CEO of electrical automotive maker Tesla, at present holds a roughly 9% stake.

CAN A POISON PILL BE A NEGOTIATING PLOY?

Although they’re supposed to assist forestall an unsolicited takeover, poison drugs additionally typically open the door to additional negotiations that may power a bidder to sweeten the deal. If the next value is smart to the board, a poison capsule can merely be cast apart together with the acrimony it provoked, clearing the best way for a sale to accomplished.

True to kind, Twitter left its door open by emphasizing that its poison capsule will not forestall its board from “participating with events or accepting an acquisition proposal” at a higher price.

Adopting a poison pill also frequently results in lawsuits alleging that a corporate board and management team is using the tactic to keep their jobs against the best interests of shareholders. These complaints are sometimes filed by shareholders who think a takeover offer is fair and want to cash out at that price or by the bidder vying to make the purchase.

Also Read | Elon Musk also threatened to buy my company. Here’s how we handled it

HOW DID ELON MUSK REACT TO TWITTER’S ANNOUNCEMENT?

Musk, a prolific tweeter with 82 million followers on Twitter, had no immediate reaction to the company’s poison pill. But on Thursday he indicated he was ready to wage a legal battle.

“If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty,” Musk tweeted. “The legal responsibility they’d thereby assume can be titanic in scale.”

Musk has publicly said that its $43 billion bid is his best and final offer for Twitter, but other corporate suitors have made similar statements before ultimately upping the ante. With an estimated fortune of $265 billion, Musk would seem to have deep enough pockets to raise his offer, although he is still working out how to finance the proposed purchase.

HOW HAS THIS DEFENSE WORKED IN THE PAST?

Takeover tussles often dissolve into gamesmanship that include poison pills and other maneuvers designed to make a buyout more difficult. That’s what happened in one of the biggest and most drawn out takeover dances in Silicon Valley history..

After business software maker Oracle made an unsolicited $5.1 billion offer for its smaller rival PeopleSoft in June 2003, the two companies spent the next 18 months fighting with each other.

As part of its defense, PeopleSoft not only adopted a poison pill that authorized the board to flood the market with more shares, it also created what it called a “customer assurance program.” That plan promised to pay prospects 5 occasions the price of their software licenses if PeopleSoft was bought inside the subsequent two years, creating an estimated legal responsibility of up to $800 million for an buying company.

PeopleSoft additionally acquired one other serving to hand when the U.S. Department of Justice filed an antitrust lawsuit search to block a takeover, though a decide dominated in Oracle’s favor.

Even although the company ended up promoting to Oracle, PeopleSoft’s protection technique paid off for its shareholders. Oracle’s closing buy value was $11.1 billion — greater than twice its authentic bid.

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