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What is the ‘poison pill’ and does it help Twitter at this time?

Twitter has just taken a “poison pill” to try to prevent billionaire Elon Musk from taking over this social network. In the past, the “poison pill” battle has proved quite effective in combating takeovers.

On April 15, Twitter’s Board of Directors announced the adoption of a limited-time shareholder rights plan, or “poison pill”. The application period is 364 days, ie until April 14, 2023. All Twitter board members agree with the above plan.

This decision comes just a day after billionaire Elon Musk – CEO of electric car company Tesla – offered to buy back 100% of Twitter shares for $43 billion, or $54.2 per share.

According to the newly announced plan, if any individual or group holds an interest rate in Twitter of 15% or more of the common shares without the approval of the Board of Directors, other shareholders will be allowed to buy shares. additional issue at a discounted price.

Currently, Elon Musk holds about 9% of Twitter shares.

What does the “poison pill” do?

The name “poison pill” comes from the fact that intelligence agents in the past often carried a poisonous pill ready to swallow when discovered and could not run away, avoiding being captured alive and tortured.

In the financial sector, a “poison pill” is a tactic used by businesses to avoid hostile takeovers by diluting the acquirer’s ownership percentage, or making the target stock become less attractive than before.

The management of the target company has the power to launch a large amount of cheap stock on the market, causing the acquirer to continuously buy more in order to gain a sufficient ownership percentage to gain control. At some point, the acquirer may have to abandon the idea because the costs are too high.

The poison pill tactic was first used against hostile takeovers in the 1980s when the New York-based law firm Wachtell, Lipton, Rosen, and Katz advised clients.

At that time, businesses were often taken over by “corporate raiders” like Carl Icahn. Today, people like Mr. Carl Icahn are known more sympathetically as “active investors”.

According to AP, Twitter has not released details about the poison pill on April 15, but will elaborate more in a report to the US Securities and Exchange Commission (SEC).

Can the poison pill be used as a negotiating tool?

Using the poison pill tactic doesn’t always mean a business doesn’t want others to buy it back. Many times, the poison pill is used as a bargaining chip, forcing the acquirer to pay a higher price or offer more attractive terms for the acquisition.

If the price and terms of the merger seem reasonable, the target company’s management may decide to put the poison pill aside and allow the acquiring company to increase its ownership percentage as usual.

Twitter also left a door open for itself, emphasizing that the newly announced poison pill will not prohibit the company’s board of directors from “working with partners or accepting a merger proposal” at a higher price.

Billionaire Jack Dorsey, co-founder and former CEO of Twitter, wrote on April 15: “Twitter is a public company, which means Twitter is for sale all the time. That is the essence of the problem.” A public company whose shares are traded on the exchange will have an advantage in raising capital from shareholders, but there is also the risk of being taken over by others, because anyone can buy and sell listed shares.

At the end of the most recent trading session on April 14, Twitter’s stock price stopped at $45.73/share, as shown in the chart below. The price of $54.2/share that billionaire Elon Musk offers is about 20% higher than the current market price.

According to the AP, the use of the poison pill tactic often leads to lawsuits. The target company’s boards and executives are often accused of taking a poison pill to keep their seats and power, not in the best interests of shareholders.

The petitioner may be the company seeking to acquire, or sometimes the shareholders of the target company themselves, if these shareholders consider the proposed merger reasonable and acceptable.

How does Elon Musk react to Twitter’s poison pill?

Billionaire Elon Musk currently owns about 9% of Twitter’s capital and his Twitter account has up to 82 million followers. On April 14, Tesla’s CEO indicated that he was ready for a legal battle if the acquisition offer was hit.

“If the current Board of Directors of Twitter takes actions against the interests of shareholders, they will violate their fiduciary obligations,” Elon Musk tweeted. “The responsibility that the Twitter board bears will be enormous.”

Elon Musk has said that the $43 billion takeover offer is the “best and last” price he’s willing to pay for Twitter. But then one day, the billionaire said he was “not sure” to buy Twitter at that price and had prepared a plan B.

Historically, many parties wanting to acquire also claimed their offer was “the best and last” but then agreed to negotiate and raise the price.

Elon Musk currently owns a net worth of about $251 billion, so it seems he has enough resources to make this acquisition. However, the billionaire is still having to arrange a specific financial plan.

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Who will compete with Elon Musk to acquire Twitter?

A private equity fund (PE) named Thoma Bravo informed Twitter that the fund was considering making an offer to buy, Reuters sources said. As of the end of 2021, Thoma Bravo is managing assets worth $103 billion. It is unclear how much the fund will pay, a spokesman for Thoma Bravo declined to comment.

According to data from Preqin, the global private fund management industry currently manages about $ 1.8 trillion in assets, so it has enough potential to participate in the Twitter acquisition.

Silver Lake, a PE fund with about $90 billion under management, is likely to side with Elon Musk. In 2018, the fund offered to fund Elon Musk’s $72 billion plan to turn Tesla from public to private. Later, Elon Musk was fined $ 20 million and had to give up the idea.

Mr. Egon Durban – co-CEO of Silver Lake is also a member of the Board of Directors of Twitter. It’s entirely possible for Silver Lake to play the Twitter buyer.

Twitter has more than $6 billion in cash on its balance sheet and an annual cash flow of nearly $700 million. Therefore, banks may be involved in financing the acquisition of a cash-rich business like Twitter.

Twitter has worked with Goldman Sachs, and Elon Musk has Morgan Stanley as a consultant. According to Bloomberg reported on April 15, Twitter reached out to JPMorgan Chase to discuss how to deal with Elon Musk’s acquisition offer.

There is not a very good relationship between Elon Musk and JPMorgan. America’s largest bank is suing electric car company Tesla over a 2018 tweet by CEO Elon Musk, Tesla then sued JPMorgan.

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