Best News Network

Explainer: What Twitter’s ‘poison pill’ is supposed to do

Twitter is trying to thwart billionaire Elon Musk’s takeover attempt with a “poison pill” – a financial device that companies have been wielding against unwelcome suitors for decades.


WHAT ARE POISON PILLS SUPPOSED TO DO?


The ingredients of each poison pill vary, but they’re all designed to give corporate boards an option to flood the market with so much newly created stock that a takeover becomes prohibitively expensive. The strategy was popularised back in the 1980s when publicly held companies were being stalked by corporate raiders such as Carl Icahn – now more frequently described as “activist investors.”

Twitter didn’t disclose the details of its poison pill Friday, but said it would provide more information in a forthcoming filing with the Securities and Exchange Commission, which the company delayed because public markets were closed Friday.

The San Francisco company’s plan will be triggered if a shareholder accumulates a stake of 15 per cent or more. Musk, best known as CEO of electric car maker Tesla, currently holds a roughly 9 per cent stake.

CAN A POISON PILL BE A NEGOTIATING PLOY?
Although they are supposed to help prevent an unsolicited takeover, poison pills also often open the door to further negotiations that can force a bidder to sweeten the deal. If a higher price makes sense to the board, a poison pill can simply be cast aside along with the acrimony it provoked, clearing the way for a sale to completed.

True to form, Twitter left its door open by emphasising that its poison pill won’t prevent its board from “engaging with parties or accepting an acquisition proposal” at a higher price.

Adopting a poison pill also frequently results in lawsuits alleging that a corporate board and management team is using the tactic to keep their jobs against the best interests of shareholders. These complaints are sometimes filed by shareholders who think a takeover offer is fair and want to cash out at that price or by the bidder vying to make the purchase.

HOW DID ELON MUSK REACT TO TWITTER’S ANNOUNCEMENT?
Musk, a prolific tweeter with 82 million followers on Twitter, had no immediate reaction to the company’s poison pill. But on Thursday he indicated he was ready to wage a legal battle.

“If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty,” Musk tweeted. “The liability they would thereby assume would be titanic in scale.”

Musk has publicly said that its $43 billion bid is his best and final offer for Twitter, but other corporate suitors have made similar statements before ultimately upping the ante. With an estimated fortune of USD 265 billion, Musk would seem to have deep enough pockets to raise his offer, although he is still working out how to finance the proposed purchase.


HOW HAS THIS DEFENCE WORKED IN THE PAST?


Takeover tussles often dissolve into gamesmanship that include poison pills and other maneuvers designed to make a buyout more difficult. That’s what happened in one of the biggest and most drawn out takeover dances in Silicon Valley history..

After business software maker Oracle made an unsolicited USD 5.1 billion offer for its smaller rival PeopleSoft in June 2003, the two companies spent the next 18 months fighting with each other.

As part of its defense, PeopleSoft not only adopted a poison pill that authorised the board to flood the market with more shares, it also created what it called a “customer assurance programme.” That plan promised to pay customers five times the cost of their software licenses if PeopleSoft was sold within the next two years, creating an estimated liability of up to USD 800 million for an acquiring company.

PeopleSoft also got another helping hand when the US Department of Justice filed an antitrust lawsuit seek to block a takeover, although a judge ruled in Oracle’s favour.

Even though the company ended up selling to Oracle, PeopleSoft’s defence strategy paid off for its shareholders. Oracle’s final purchase price was USD 11.1 billion – more than twice its original bid.

Stay connected with us on social media platform for instant update click here to join our  Twitter, & Facebook

We are now on Telegram. Click here to join our channel (@TechiUpdate) and stay updated with the latest Technology headlines.

For all the latest Business News Click Here 

 For the latest news and updates, follow us on Google News

Read original article here

Denial of responsibility! NewsAzi is an automatic aggregator around the global media. All the content are available free on Internet. We have just arranged it in one platform for educational purpose only. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials on our website, please contact us by email – [email protected]. The content will be deleted within 24 hours.