Most takeovers involve cordial relations. In confidential negotiations between corporate leaders, a company or group of investors makes a bid for another company. The businesses involved in the merger or acquisition declare a deal has been reached after some are negotiating.
However, some takeovers are more hostile than others. Not every business desires to be acquired. This applies to Elon Musk’s $43 billion offer to purchase Twitter.
Companies have various tools at their disposal to thwart such unwelcome incursions. The shareholder rights plan, also known as a “poison pill,” is one of the best anti-takeover defenses. It is intended to prevent a single investor from acquiring a controlling interest in a business.
Immediately following Musk’s announcement of his takeover offer in a Securities and Exchange Commission (SEC) filing, Twitter launched a poison pill strategy on April 15, 2022.
I’m a corporate finance expert. Let me tell you why, until recently, poison tablets have worked so well to fight off uninvited offers.
A poison pill is what?
In the early 1980s, poison pills were created as a deterrent strategy against corporate raiders to effectively sabotage their takeover attempts; they were somewhat similar to the death pills that spies are rumored to take if they are arrested.
Poison pills come in different forms, but they always tend to raise the number of shares, which reduces the bidder’s ownership and results in a substantial financial loss for them.
Assuming that a corporation had 1,000 outstanding shares with a $10 per share value, its market value would be $10,000. 100 shares costing $1,000 are purchased by an activist investor, who increases his or her position in the company to a sizeable 10%. The other shareholders would suddenly have the chance to purchase additional shares at a discounted price, say, half the market price, if the firm, however, had a poison pill that is activated after any hostile bidder acquires 10% of its stock. As a result, the activist investor’s initial investment quickly becomes worth far less than it originally was and is rapidly diluted.
Twitter took similar action. Other shareholders would have the right to purchase additional shares at a discount if any shareholder reached a 15 percent ownership in the firm through a purchase that was not authorized by the board of directors, reducing the 9.2 percent holding Musk previously acquired.
The easy adoption of poison tablets makes them handy, although they typically have expiration dates. For instance, the poison pill Twitter adopted had a one-year shelf life.
A Technique That Works
Many well-known businesses, including Papa John’s, Netflix, JCPenney, and Avis Budget Group, have successfully resisted hostile takeovers by using poison pills. Additionally, nearly 100 businesses implemented poison pills in 2020 out of concern that their collapsing stock values, brought on by the pandemic market slump, would leave them open to aggressive takeovers.
No one has ever activated or ingested a poison pill intended to thwart an unwanted take
over offer, demonstrating how successful such precautions are at thwarting takeover efforts.
Anti-takeover tactics of this nature are typically viewed as weak corporate governance practices that can harm a company’s performance and value. They may be perceived as obstacles to shareholders’ and outsiders’ abilities to evaluate management, and they may serve more to safeguard the board and management than to entice more advantageous offers from prospective buyers.
Poison pills, however, can be advantageous to shareholders if they, for instance, result in a greater offer for the company. Twitter may already be experiencing this due to the appearance of a new bidder, a $103 billion private equity group.
