April 15, 2022
After Elon Musk offered to buy Twitter’s outstanding shares for $54.20, a premium over its existing share price, Twitter’s Board, management and employees went into a frenzy. On April 14th, Twitter announced it would seriously consider the offer, but it was clear that they were not going to accept the offer and let Musk take Twitter private and revamp it as a “free speech” platform.
Instead, between April 13–14, Twitter management and its Board huddled with its lawyers and investment bankers and today announced the adoption of a shareholder rights plan — otherwise known as a “poison pill”.
The shareholder rights plan kicks in if any single person or entity acquires more than 15% of Twitter outstanding stock. The “poison pill” is then deployed and Twitter authorizes the issuance and purchase of additional shares to its existing shareholders for a discount, usually half the price of the existing market price for the shares. So if Twitter was trading at $45/share and the rights plan was executed, existing shareholders, except for Musk (the the hostile takeover entity), would have the right to buy additional shares at $22.5/share. This is legal under Delaware law.
Since a large number of shareholders would exercise that right simply to preserve the value of their existing shares (from dilution), this would have the effect of diluting Musk’s ownership in the company. So if Musk starts buying more shares on the open market in an attempt to control the company, once he reaches the 15% mark, the “poison pill” is deployed and his share ownership can theoretically drop under 10%. This happens when Twitter issues more shares and shareholders purchase the shares at a discount. This would also cause a loss of value in the share price, hence why it is caused a “poison pill”.
So while Twitter has not yet outright rejected Musk’s current “best” offer for the company, this preemptive move means they plan to reject it and also defend themselves against a hostile takeover in case Musk tries to buy more shares.
Now Elon needs to make the next move. He has a couple options at this point. The stock price is currently trading over a 20% premium to what he paid for his shares. He can dump the shares on the open market on Monday and collect a profit. The shares of Twitter will surely decline when the market reopens on April 18, 2022. Or, he can wait until the shares drop on the “poison pill” news and start buying more shares. Of course, once he does that and hits the 15% threshold, the poison pill will be deployed and he will be diluted in due course again.
However, Elon is worth nearly $280 billion. So even if Twitter doubles the amount of its outstanding shares through this strategy, Elon has more than enough funds to buy the company if he can accumulate more than 50%. The problem is there are not enough open shares on the market for Elon to even get close to the 50% mark. Large institutional shareholders, like Vanguard or the Saudi Kingdom private equity fund, hold large blocks of shares which they likely will not divest. The Kingdom has already said it rejects Elon’s offer. So unless everyone (except for Twitter’s Board and its employees) dump Twitter’s shares on the open market, it’s nearly impossible for Musk to get to the magic 51% ownership threshold without the Board outright authorizing a sale of the company to Musk. That’s their plan and they just executed it.
So for now, Musk’s ambitious plan to acquire Twitter looks dead in the water. Musk warned that if Twitter didn’t accept this offer he would have to “reconsider” his share purchase, which I take to mean divesting himself of Twitter’s shares. Once that happens, Twitter drops even further and we see the stock sinking to $20 levels. Elon doesn’t like to lose, however, and hinted at a “Plan B”. Now that Twitter has threatened the “poison pill” Elon can force them to swallow it. So an alternative to dumping shares would be for Elon to buy more and get to the 15% mark and force Twitter to execute its poison pill. Of course doing so would cause the stock to drop at least for a while and Elon will be looking at loss of value in his shares. But Musk doesn’t need the money right now and can ride this out.
Elon it’s now your move.