EXPLANATION: What Twitter’s ‘poison pill’ is supposed to do

Twitter is trying to thwart billionaire Elon Musk’s takeover attempt with a “poison pill,” a financial device that companies have been using against unwanted suitors for decades.

Twitter is trying to thwart billionaire Elon Musk’s takeover attempt with a “poison pill,” a financial device that companies have been using against unwanted suitors for decades.

WHAT ARE POISON PILLS SUPPOSED TO DO?

The ingredients in each poison pill vary, but all are designed to give corporate boards the option of flooding the market with so many newly created shares that a takeover becomes prohibitively expensive. The strategy was popularized in the 1980s when publicly traded companies were being hounded by corporate raiders like Carl Icahn, now more often described as “activist investors.”

Twitter did not disclose the details of its poison pill on Friday, but said it would provide more information in an upcoming filing with the Securities and Exchange Commission, which the company delayed because public markets were closed on Friday.

The San Francisco company’s plan will be activated if a shareholder accumulates a 15% stake or more. Musk, best known as CEO of electric carmaker Tesla, currently owns a roughly 9% stake.

CAN A POISON PILL BE A NEGOTIATION STRATEGY?

Although they are supposed to help prevent an unsolicited takeover, poison pills often also open the door to more negotiations that can force a bidder to sweeten the deal. If a higher price makes sense to the board, a poison pill can simply be thrown away along with the acrimony it caused, clearing the way for a sale to be completed.

The adoption of a poison pill also frequently gives rise to lawsuits alleging that a company’s board of directors and management team use the tactic to retain their jobs against the best interests of shareholders. These complaints are sometimes filed by shareholders who think a takeover bid is fair and want to charge at that price or by the bidder competing to make the purchase.

HOW DID ELON MUSK REACT TO THE TWITTER AD?

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

“If the current Twitter board takes action contrary to the interests of shareholders, it would be in breach of its fiduciary duty,” Musk tweeted. “The responsibility they would take on would be on a titanic scale.”

Musk has publicly said his $43 billion offer is his best and last offer for Twitter, but other corporate suitors have made similar claims before finally upping the ante. With an estimated fortune of $265 billion, Musk appears to have deep enough pockets to raise his offer, though he is still figuring out how to finance the proposed purchase.

HOW HAS THIS DEFENSE WORKED IN THE PAST?

Takeover fights often break down into games involving poison pills and other maneuvers designed to make buying difficult. That’s what happened in one of the largest and longest takeover balls in Silicon Valley history.

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

As part of its defense, PeopleSoft not only adopted a poison pill that authorized the board to flood the market with more stock, but also created what it called a “customer guarantee program.” That plan promised to pay customers five times the cost of their shares. software licenses if PeopleSoft was sold in the next two years, creating an estimated liability of up to $800 million for an acquiring company.

PeopleSoft also received other help when the US Department of Justice filed an antitrust lawsuit to block a takeover, although a judge ruled in Oracle’s favor.

Although the company ended up being sold to Oracle, PeopleSoft’s defense strategy paid off for its shareholders. Oracle’s final purchase price was $11.1 billion, more than double the original offer.

New Technology Era

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