What is a poison pill that Twitter Board of directors are talking about against the buyout from Elon Musk

Elon Musk recently made an offer to buy out Twitter at an amazing valuation of $43 billion USD. while many are against Elon Musk buying Twitter, many are supporting him. Many even brought up the fact that Jeff Bezos owns The Washington Post, then why can’t Elon buy Twitter.

However, the Twitter board has gone in a different direction. The board of directors are talking about a poison pill against any kind of buyout from Elon Musk. Even though Elon has offered more than the current market valuation of the company. Elon has even stated that this kind of move is totally against the shareholder’s interest.

Now let’s come back to the question what is a Poison pill?

The approach, known in the finance industry as a “poison pill,” simply allows existing shareholders to buy newly issued shares in a firm at a discount to the trading price, effectively making any hostile takeover effort exceedingly expensive and impractical.

The Poison Pill’s History

The word “poison pill” comes from the time of warfare and espionage, when spies carried poison pills that might be swallowed to prevent detection. If they feared they were about to be detected, spies would take these pills, similar to how a target corporation may use poison pills to avert aggressive takeovers.

The term “poison pill” first appeared in the field of corporate finance in the United States. Poison pill tactics were used to deter a possible acquirer from pursuing a merger or acquisition.

Wachtell, Lipton, Rosen, and Kantz were the first to use this strategy. During a takeover war in the 1980s, Martin Lipton created the technique as a defence. T. Boone Pickens had his eye on his customer, a company called General American Oil. Martin Lipton encouraged General American Oil’s board of directors to flood the market with fresh shares of the company’s stock, diluting the equity and making the acquisition considerably more costly (since Pickens would have to purchase many more shares to gain a co).

This strategy was contentious at the time, and it was suspected of being a breach of fiduciary obligation. The Delaware Supreme Court, on the other hand, deemed the poison pill technique legitimate in 1985.

Poison Pills Come in a Variety of Forms

Various ways have evolved since Lipton’s use of the poison pill. The overall goal is to deter any outside takeover attempts by making the firm less appealing or putting present owners in a stronger position. Both of these objectives can be met by selling existing shareholders cheaper shares, so diminishing the potential equity received by the buyer and also providing greater equity to existing shareholders.

A flip-in provision is a frequent form of poison pill technique.

The Provision for Flipping-In
Existing shareholders can buy company shares at a discount under the flip-in plan. This discount is frequently large, allowing current shareholders to consolidate their equity claim in the company’s non-acquired component. This right to purchase is granted prior to the completion of the takeover or acquisition, and it is usually triggered when the acquirer reaches a specified ownership % level. The acquisition of discounted firm shares dilutes the acquirer’s equity, lowering the value gained for the price spent. Because each share now owns a smaller portion of the corporation, all shareholders now have equal voting power on the board.

Existing shareholders (excluding the acquirer) will, nevertheless, have effectively consolidated power as a result of the reduced stock purchase.

Effectiveness

Poison pills can be quite successful at deterring purchases, but they aren’t always the first line of defence. This is because the plan isn’t completely certain to work, as a poison pill won’t definitely stop a persistent buyer from acquiring the company. Furthermore, if used incorrectly, this strategy may end up weakening the company.

Poison Pills Examples

To prevent Karl Icahn from attempting a hostile takeover, Netflix implemented a Poison Pill (shareholder rights plan) in 2012. Netflix instantly went on the defensive after learning that Icahn had purchased a 10% investment in the company. Any attempt to purchase a big ownership position in Netflix without board approval would result in a flood of new shares into the market, making any investment acquisition extremely costly.