Elon Musk, the
world’s richest man, plans to takeover one of the world’s biggest social media
platforms – Twitter, but the Parag Agrawal-led tech giant is not all enthused.
Musk’s offer to buy all of Twitter, that is a 100% stake, has made the
microblogging website plan financial measures to ward off a hostile takeover.
The financial device that Twitter plans to swallow in order to stop getting
eaten up by Musk is called a “poison pill”.

What is a
poison pill?

Poison pills have
been in use for decades. They first came into existence in the 1980s when
public companies were being hunted by corporate “raiders” like Carl Icahn and
other such “activist investors”.

Also Read | What is Twitter doing to stop Elon Musk’s takeover bid: Explained

While every poison
pill is unique, the general purpose is to allow corporate boards to flood the
market with such a massive amount of newly-created stock that a takeover
becomes prohibitively expensive.

Twitter’s
poison pill

Twitter is yet to
reveal the details of its strategy, but a poison pill seems in the offing. The
San Francisco-based tech giant said on Friday that details of its poison pill
will be revealed in its forthcoming filing with the Securities and Exchange
Commission. The filing was delayed as public markets stayed closed on Friday.

Also Read | Elon Musk slams US SEC, claims the agency forced settlement over Tesla tweets

According to the
company, the poison pill will kick-in if a shareholder accumulates more than
15% stake in the company. Musk currently owns 9%.

A negotiating
ploy?

Poison pills are
often used as negotiating devices to make the seeking investor sweeten the
deal. If the corporate board gets the right price, it may cast aside the poison
pill clearing the way for a sale.

Also Read | Twitter not ‘held hostage’ by Musk’s offer: CEO Parag Agrawal tells staff

While setting upon
a poison pill, Twitter has left its doors open for further negotiations saying
that the poison pill won’t stop the board from “engaging with parties or
accepting an acquisition proposal.”

WDMT: What did
Musk tweet?

Elon Musk is
perhaps one of the most prolific users of the social media platform. With 82
million followers and nearly every tweet making it to the news, he did not say
much on the poison pill.

Also Read | What NFL star Tom Brady wants from Elon Musk if he buys Twitter

What he did say on
Thursday was: “If the current Twitter board takes actions contrary to
shareholder interests, they would be breaching their fiduciary duty. The
liability they would thereby assume would be titanic in scale.”

Will he, won’t
he, sweeten the deal?

Elon Musk says his $43 billion offer is the most Twitter can get from the Tesla CEO. With $265
billion in his coffers, Musk may well choose to go for a higher price later.
While he does have pockets deep enough, he is still looking for ways to finance
his takeover.

Legal consequences

Poison pills often
make for bitter lawsuits. Shareholders sometimes allege that the corporate
board is looking to stave off a takeover to save their jobs going against the
best interests of shareholders. There are also those who go to courts because
they think the takeover offer is fair and want to cash out.

Do poison
pills work?

Poison pills are
designed to make buyouts more difficult and often serve to raise the price. When
Oracle, the world’s second-largest software company in 2020, made an unsolicited
bid of $5.1 million to PeopleSoft, a smaller rival, PeopleSoft hit back with a
poison pill and more.

Also Read | Saudi prince on Twitter board of directors rejects Elon Musk’s takeover bid

The apparent small
fry authorised its board to flood the market with more shares and created a “customer
assurance programme.” The plan pledged to pay customers five times the price if
the company were to be sold within the next two years. PeopleSoft also went
into a legal battle, which it lost. However, when the company was indeed finally
sold to Oracle, it went for $11.1 billon, nearly double the initial offer
price.