Recently, Twitter countered Elon Musk’s offer to buy the company for more than $43 billion with a corporate tool known as a poison pill, a defensive strategy to fend off takeovers.
What is a poison pill?
- A poison pill is a manoeuvre that typically makes a company less palatable to a potential acquirer by making it more expensive for the acquirer to buy shares of the target company above a certain threshold.
- The whole point of it is to make the offer from the board more attractive than the acquirer.
- The strategy also gives a company more time to evaluate an offer and can give the board leverage in trying to force a direct negotiation with the potential acquirer.
What is done in this strategy?
- A poison pill is officially known as a shareholder rights plan, and it can appear in a company’s charter or bylaws or exist as a contract among shareholders.
- There are different types of poison pills, but usually, they allow certain shareholders to buy additional stock at a discounted price.
- The only shareholder blocked from making these discounted purchases is the one who triggers the poison pill. It is triggered when a person, usually the acquirer, hits a threshold for how many shares they own. If they hit that threshold, the value of their shares is suddenly diluted as other shareholders make discounted purchases.
- In Twitter’s case, the pill would flood the market with new shares if Musk, or any other individual or group working together, bought 15% or more of Twitter’s shares. That would immediately dilute Musk’s stake and make it significantly more difficult to buy up a sizeable portion of the company. Musk currently owns more than 9% of the company’s stock.