DETROIT: Twitter has dropped a major roadblock to Elon Musk’s efforts to take over the company, leaving investors wondering what Tesla’s mercurial CEO will do next.
The social media company has adopted a “poison pill” defense that makes it difficult for Musk or any other investor to buy Twitter without board approval. Musk, who currently owns about 9% of the company, last week unveiled an offer of about $43 billion, or $54.20 per share.
Twitter’s likely next move is to formally reject Musk’s offer, though he may negotiate. Musk has a number of options that also include talks with the board, sweetening his offer or even triggering the poison pill, which experts say would be disastrous for the company.
In a regulatory filing on Monday, Twitter’s board said it approved the defensive move aimed at protecting the company from “coercive or otherwise unfair” takeover tactics.
The board leaves open the possibility of negotiating with Musk or another suitor. The filing says the shareholder rights agreement should not interfere with a board-approved merger or bid.
Although he said his offer was “final”, Musk may have to increase his offer to satisfy other shareholders. A Saudi prince who is a major Twitter shareholder scoffed at the offer last week in a tweet. Al Waleed bin Talal said he doesn’t believe $43 billion is close to Twitter’s value given its growth prospects. Twitter shares hit an all-time high of $77.63 in March 2021.
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When he went public with his bid, Musk didn’t provide any financing details, but such disclosure could improve his chances. He could raise money by borrowing billions using his stakes in Tesla and SpaceX as collateral, and he could bring in other investors.
The poison pill would give shareholders starting April 25 the right to buy one-thousandth of a preferred share for every common share they hold, at a price of $210. Rights are triggered if a person or group of investors purchases 15% or more of the company’s stock without board approval.
The preferred stock would have the same voting rights as a common stock, according to the filing, which does not specifically mention Musk.
The poison pill would essentially mean the end of Twitter if Musk or another investor acquires 15% or more of the company, said James Cox, professor of corporate and securities law at Duke University.
Shareholders who exercise the rights and buy a preferred stock at $210 would get $420 in stock or Twitter assets, he said. That would be more than Twitter can afford to pay, and would likely send the company into receivership, Cox said.
“You want to create an event that Musk would never want to trigger because it would be the death of Twitter,” Cox said. He predicts that Musk and the board will negotiate, at least for a while, adding that no investor has ever crossed the line to activate a poison pill.
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If Musk triggered the poison pill, he risks wiping out much of the money he has invested in Twitter because his stake would be diluted, said Eric Talley, a Columbia University law professor. “You want to deter someone from deliberately triggering the poison pill,” Talley said.
Twitter’s board has information the average shareholder doesn’t, such as earnings or market growth projections, and whether there’s reason to believe the stock’s value is artificially depressed, Talley said. The council, he said, could just hold on.
“They’re sitting on a poison pill right now which is a bit of a hurdle. From a corporate law perspective they’re on pretty solid footing right now if they keep this in place and say they don’t are not comfortable negotiating at this stage.”
Musk said in his offer that Twitter “must be transformed into a private enterprise” in order to build trust with users and better serve what he calls the “societal imperative” of free speech. He said shareholders, not the board, should decide whether Twitter goes private.
Shares of Twitter closed Monday up 7.5% at $48.45, still $5.75 less than Musk’s bid. It’s a sign that investors are skeptical of Musk’s ability to close the deal.
Musk began accumulating Twitter shares in late January, ending up with a stake of around 9%. Only Vanguard Group controls more shares. A lawsuit filed last week in federal court in New York alleged that Musk unlawfully delayed disclosing his stake so he could buy more shares at lower prices.
Musk took to Twitter to slam board members in recent days, saying he would save around $3 million a year by cutting board pay to zero if his bid is successful, and noting that board members collectively owning only a small financial stake in Twitter shows that their “economic interests are simply not aligned with those of shareholders.”
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Musk, who has more than 82 million followers, is a prolific tweeter who has criticized other celebrity accounts for not tweeting enough, suggesting it’s a sign Twitter is dying.
The takeover episode will put pressure on Twitter executives to show the company isn’t underperforming, said Olaf Groth, a business professor at the University of California, Berkeley. Even the whole social media business model of making money from advertising — which Musk questioned — is now “under discussion,” Groth said.
“He can decide it’s not worth it and he’s sent a political signal to push,” Groth said. “Now all eyes are on Twitter and the clock is ticking.”