On 15th April 2022, Twitter Board unanimously agreed to authorize a Shareholder Rights plan (A Poison Pill as they used to called in the nostalgic 80’s) to frustrate Elon Musk’s takeover attempt.
Now, for those who have in the past attended my M&A workshops, you will know that I describe a Shareholder Rights plan as a pre-emptive defence mechanism i.e., a company tends to put one in place in anticipation of a possible hostile bid in the foreseeable future. With Twitter, the Rights Plan is being put in place while the Barbarians are already at the front door! The question is why so late?
Well, for one thing, I suspect that the Board never expected a hostile bid like this. Although one could argue that employing a Rights Plan should be like normal insurance – you never expect the ghastly to happen but want to be covered should it does. The other reason is probably more to do with the Shareholders themselves:
Under the Rights Plan, Shareholders will effectively be intitled to additional shares at half the current share price should Musk’s shareholding (plus any the shareholding on any other Bandidos who are prepare to join him) go above 15% without approval of the Board. Again, in the old days, the trigger point for a Rights Plan used to be at 51% (i.e. control) but these days you can find them as low as 5%, but that is more to throw off Shareholder activists like Carl Icahn (An article for another time). Anyway, any additional issuance of shares in this way would mean that Musk and his Bandidos would then have spent more money to buy those newly issued shares as well, rendering the deal far too expensive in the process.
Under the Rights Plan, Shareholders will effectively be intitled to additional shares at half the current share price should Musk’s shareholding (plus any the shareholding on any other Bandidos who are prepare to join him) go above 15% without approval of the Board. Again, in the old days, the trigger point for a Rights Plan used to be at 51% (i.e. control) but these days you can find them as low as 5%, but that is more to throw off Shareholder activists like Carl Icahn (An article for another time). Anyway, any additional issuance of shares in this way would mean that Musk and his Bandidos would then have spent more money to buy those newly issued shares as well, rendering the deal far too expensive in the process.
While reports say that the Board has adopted the Poison Pill (I prefer the old name), as anyone with knowledge of these things will tell you, a poison pill normally requires shareholder approval first – boards cannot just will-nilly authorise the issuance of new shares. This means that Twitter shareholders were quite happy to authorise a poison pill even when a hostile takeover was already effectively in progress.
Again, this is not normally the case given that Shareholders can only benefit from a hostile takeover due to the fact that an Acquirer will generally have to offer a massive premium to entice Shareholders to sell.
I suspect that Twitter shareholders are very keen to do a deal here and have calculated that a limited duration Poison Pill, together with a clause which allows Musk to continue to engage the Board, could be just the way to do it – with a juicy premium. Musk is already offering a 38% premium and Shareholders must think that they can squeeze him for some more. The poison pill, in this case, is therefore not a mechanism to swat away any hostile takeover (as normally would be the case), but more of a way to squeeze the Acquirer.
Musk and his Bandidos will likely have to pay a hefty price (I suspect more of 40% -45% premium) if they want control. Afterall, Musk did say he is not worried about making money on Twitter, so he probably would be happy to pay such a hefty premium – I would like to see him persuade other potential Bandidos want to charge the enemy with such a maverick leader?
At time of writing, Bloomberg reports that it looks like deal may be concluded by Monday, 2nd May. Can’t wait to see the terms – and who will be the Bandidos at his side.