Twitter's Poison Pill: Explained | Revolution ReadOn | English - YouTube

Elon Musk sure does know how to stay in the news.

His current agenda is making social media a platform for free speech, without censorship.

And to do this he wants to buy Twitter.

He has already positioned himself as a strong buyer for the company by acquiring 9.2% of

Twitter shares.

He is the second-biggest shareholder (and the biggest individual shareholder) of the

company after Vanguard Group.

And he has major plans for Twitter as well: adding an edit button and converting the Twitter

headquarters into a homeless shelter.

So, is Twitter up for grabs?

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Poison Pill

Elon Musk has mentioned his offer for Twitter: $43 billion or $54.20/share (a 20.23% premium

over the market price when the bid was announced).

But the company thinks this is too low an amount.

The company's share hit $70 just a year ago, making the bid too low for the investors.

So, no deal?

Well, Musk wants Twitter by hook or by crook.

So, he has threatened that he will dump his entire share in Twitter if the company refuses

to take his offer.

And that's a big deal.

Because Musk knows how to move markets.

The day he became Twitter's top stakeholder, the company's shares rose 27%.

Even if Musk didn't own a majority of Twitter shares, his disinvestment could cause a major

downswing in Twitter shares impacting shareholders.

In such a case Twitter shareholders could sue the company for neglecting its duty to

them.

So, Twitter has devised a poison pill.

What's a poison pill?

You see, t conference rooms at major companies are no less than war rooms.

Hardcore war-like strategies are devised in these rooms to stay ahead of competition.

And just like war spies have a poison pill that they bite in case they are captured,

companies have a poison pill to prevent a hostile takeover like Musk's.

A poison pill is basically a move that a company uses to make acquisition costlier or undesirable

for potential buyers.

There are several different types of poison pills.

Twitter's poison pill is: Limited duration shareholders rights plan.

This provision will give existing shareholders the right to buy extra shares at a discount

if a particular shareholder's holding rises above 15%.

The company often has to create new shares to issue to the shareholders.

And the person who triggers this clause (in this case Musk) won't get the option to buy

discounted shares.

Basically this will allow shareholders to buy stocks for cheap and raise their shareholding

percentage in the company.

The company can even create new shares to issue to these shareholders.

This helps keep the control of the company with existing shareholders, if they wish to

exercise their right.

Existing holders taking more stake or the company adding more shares would automatically

decrease the shareholding of the buying party.

Let's assume Twitter has a 100 shares right now.

And Musk owns 9.2% of this or 9.2 shares.

If the company now launches 50 more shares none of which Musk can buy, then his shareholding

will become 9.2/150*100= 6.1%

So getting more shares to call the shots in the company will become more expensive for

Musk.

Because each time he plans to buy more shares existing shareholders can buy even more shares

at a discount and dilute his holding.

This process can go on for a year.

And till then Twitter will probably have a better plan in place.

But wait, why is it called a poison pill?

Because the shareholders will have to constantly pump their money to best Musk.

Plus, creating more shares could also cause the stock price of the company to fall.

However, these are losses the company will have to bear to save itself in the long run.

But even Musk won't be easily deterred.

He has claimed he has another plan in case Twitter rejects his bid.

Could the new plan be a social media platform of his own?

In a line: The poison pill move is a quick way to stop a hostile takeover till the company

finds a better way to fend for itself.

This may hurt the company in the short run, but it can save it in the long run.

Quick Question: Do you think a social media platform should have zero censorship?

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