Twitter on Friday revealed its counterattack against Elon Musk, putting into practice a corporate maneuver known as the “poison pill”. The strategy aims to disrupt or block Musk’s $43 billion bid to buy the chain.
The strategy, devised by law firms in the 1980s to protect companies from corporate intruders, allows the target company to flood the market with new shares or let shareholders who are not interested parties in the business buy them with discount.
This tactic serves to discourage and prevent controlling interest from being transferred to a large investor or corporation in a hostile manner. And that means anyone trying to acquire the company must deal directly with the board.
The “pill” will be triggered as soon as any individual or group of people buys 15% or more of Twitter’s stock. Musk currently owns over 9%.
Twitter said the plan would be in place until April 14 of next year, adding that it would not prevent the company from holding sales talks with any potential buyers, but that the mechanism would give it more time to negotiate a deal.
On Thursday, Musk announced his intention to acquire the social media service, a purchase he believed would allow him to reverse Twitter’s moderation policies.
Last week, Twitter offered Musk a seat on the board, but the deal soured when it became clear he could no longer freely criticize the company.
He rejected the offer on Saturday (9) and communicated to Twitter on Wednesday night (13) about his acquisition plans. The maneuver is Twitter’s latest strategy to contain the billionaire.
Twitter said in a statement that its plan “is similar to other plans adopted by publicly owned companies in comparable circumstances”.
Companies are often wary of using “poison pills” because they limit shareholder rights. Still, some critics, such as Institutional Shareholder Services, an influential advisory group, have indicated they are open to the tactic in certain circumstances.
If Musk, who is the founder of Tesla and SpaceX, wants to continue his pursuit of Twitter, he will now need to take the plan to shareholders. When making a public offering, he would have to convince Twitter investors to sell their shares directly to him, allowing him to gain control of the company.
Twitter’s other major shareholders, according to FactSet, include the Vanguard Group, with a 10.3% stake; Morgan Stanley Investment Management, with an 8% stake; and BlackRock Fund Advisors, with 4.6%.
One of the founders of Twitter, Jack Dorsey, who is friends with Musk, has a 2.2% stake. Ark Investment Management, led by Cathie Wood, a star of the Reddit investor community, has a 2.15% stake.
Musk appeared to be gearing up for a protracted battle on Thursday. Still, it’s unclear who will be on his side.
Its initial offering left open significant questions about its funding capacity. Musk hired Morgan Stanley to advise on the offer, though the investment bank isn’t typically known for financing large-scale deals on its own.
And Twitter shareholders seemed cautious: Shares were down nearly 2% on Thursday to close at $45.08 — significantly below Musk’s bid. Markets closed this Friday for the holiday.
Saudi Arabia’s Prince Alwaleed bin Talal, who bills himself as one of Twitter’s oldest and largest shareholders, said on Thursday that the offer should be rejected as not being high enough or reflecting “intrinsic value”. from the company. Analysts also suggested that the price offered by Musk was too low and did not reflect Twitter’s recent performance.
Musk argued that making Twitter private would allow the platform more freedom of expression.
“Having a public platform that is both extremely credible and widely inclusive is hugely important for the future of civilization,” he said in an interview at the TED conference on Thursday.
He also insisted that the algorithm Twitter uses to classify its content, deciding what hundreds of millions of users see on the service every day, must be public and auditable.
Musk’s concerns are shared by many executives on Twitter, who have also pushed for more transparency about their algorithms. The company has published internal research on the bias of its algorithms and funded an effort to create an open and transparent standard for social media services.
But Twitter rejected Musk’s aggressive tactics. After a board meeting Thursday morning, the company began looking at options to block the billionaire’s move.