Midland was a steady, if boring bank when HSBC acquired it in 1992, in one of the largest bank take overs in the UK at the time.  I, and many like me, certainly had great hope that, as a combined entity, it would be world beater for ever more.

31 years later and HSBC is facing a crucial AGM on 5^th May where Shareholders will be asked to decide on whether the Bank needs to spin off its Asian business from the rest (Western) business. The instigator of this vote is Ping An Asset Management, one of HSBC’s key Asian Shareholders, who has pushing for a while for just such a corporate action, arguing that it would release over $26bn of Shareholder value.

Mark Tucker and Noel Quinn (HSBC Chairman and CEO respectively) are having none of it, arguing the complexity of a break up and possible loss of synergies as some of the reasons not to head down that road. With the Asian business currently responsible for over 60% of the group profits, a break up would indeed be a huge, and likely messy, exercise. Just the thought of separating the systems would send shivers down my spine.

The problem is, HSBC has been a sluggish performer over at least the last decade, with returns lagging those of its peers and there is certainly a feeling among long suffering Shareholders that something has to give.  The only question is what.

It is difficult to say if Ping An has enough support for a spin off vote on the 5th, so difficult to call the outcome.  However, even if they lose, I would bet my bottom pound that their campaign will not die with the vote.  Instead, it will just up the ante and launch a massive charm offensive to persuade Shareholders.  Unless Quinn can reverse the fortunes of HSBC – and fast, the break up calls will become louder and more persuasive – and something will have to give….maybe it will be back to my old Midland bank….

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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, 2^nd May.  Can’t wait to see the terms – and who will be the Bandidos at his side.

The post What an interesting twist in the battle for Twitter last week. appeared first on Future Capital.