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April 19, 2022

What is a poison pill? How Twitter’s plan to block Elon Musk’s hostile takeover bid would work

Last week, Twitter announced a “poison pill” plan in response to Tesla CEO Elon Musk’s offer to buy Twitter outright and take it private. But what exactly is a poison pill?

In this video, you’ll not only get a crash course in the latest round of “Elon Musk vs. Twitter”, you’ll find out exactly how the poison pill Twitter has implemented is designed to work. You’ll also learn the history of when the corporate poison pill was invented, and that during the period of 1997 to 2001 – the Dot Com era – for every company that successfully used a poison pill defence to deter a takeover, a full twenty companies ended up getting taken over.

While the name does indeed come from the use of poison pills by captured spies to avoid interrogation, a corporate poison pill is not designed to kill a company. It’s more formally known as a shareholder rights plan, and only gets triggered when a potential acquirer crosses a certain ownership threshold – 15 per cent in the case of Twitter.

Once triggered, it allows all the other shareholders – except the acquirer – to buy more shares at a deep discount. In Twitter’s TWTR-N -0.78%decrease plan, they will let everyone buy a newly created class of preferred shares: 1/1000th of a preferred share per common share they already own. But these new fractions of a share have the same voting power as a full common share.

And because we apparently can’t get enough of the 4/20 obsession (a meme associated with cannabis culture): the exercise price to buy 1/1000th of these new preferred shares will be $210 and their value will be set at twice that amount which is … $420.

If the poison pill gets triggered, it will have the effect of diluting the acquirer’s position and therefore the acquirer may think twice about simply buying more shares. What it also does is buy time and leverage.

The board can use the existence of a poison pill to drive a better deal with the acquirer. But in the end, it’s the shareholders who have the final say. They could be persuaded to vote against the board because Twitter’s share price hasn’t really done much since its IPO in 2013.

Maybe it is indeed time for new management. Whether that ends up happening, and whether or not it’s Mr. Musk at the helm, is still unknown.

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