How Twitter plans to thwart Elon Musk’s takeover bid

Strategy would gut the value of Musk’s share in Twitter stock

By Lauren Hirsch and Kate Conger

New York Times

Twitter unveiled its counterattack against Elon Musk on Friday, using a strategy invented to repel corporate raiders in an attempt to block a takeover bid by the world’s richest man.

The strategy, known as a poison pill, would flood the market with new shares if Musk, or any other individual or group working together, bought 15% or more of Twitter’s shares. That would immediately reduce Musk’s stake and make it significantly more difficult to buy up a sizable potion of the company. Musk currently owns more than 9% of the company’s stock.

The goal is to force anyone trying to acquire the company to negotiate directly with the board. Investors rarely try to break through a poison pill threshold, securities experts say, with the caveat that Musk rarely abides by precedent.

Companies are often wary of using poison pills because they do not want to be seen as unfriendly to shareholders. Still, some critics, like Institutional Shareholder Services, an influential advisory group, have indicated that they are open to the tactic in certain circumstances.

Twitter said the mechanism would not stop the company from holding talks about a sale with any potential buyer and would give it more time to negotiate a deal that offers a sufficient premium.

The pill “does not mean that the company is going to be independent forever,” said Drew Pascarella, a senior lecturer of finance at Cornell University. “It just means that they can effectively fend off Elon.”

Musk announced his intention to acquire the social media service Thursday, making public an unsolicited bid worth more than $40 billion. In an interview later that day, he took issue with Twitter’s moderation policies, calling Twitter the “de facto town square” and saying that “it’s really important that people have the reality and the perception that they are able to speak freely within the bounds of the law.”

He also said he had a Plan B if the board rejected his offer, though he did not share it.

Analysts have said Musk’s bid — which offers significantly more per share than the current stock price but is well below its peak last year — may undervalue the company. They have also raised concerns about Musk’s ability to cobble together financing. If the board negotiated a deal with Musk, it could include a sizable breakup fee that might assuage concerns about his volatile nature conflicting with the ability of the deal to close, some securities lawyers said.

Twitter attempted to wrangle Musk in recent weeks as he snapped up its shares. Last week, Twitter offered him a board seat, but he soured on the arrangement when it became clear that he would no longer be able to freely criticize the company. He rejected the role Saturday and informed Twitter on Wednesday evening of his acquisition plans.

Twitter said in a statement that its poison pill plan, which will remain in effect until April of next year, “is similar to other plans adopted by publicly held companies in comparable circumstances.”

Twitter’s other top shareholders, according to FactSet, include the investment giant Vanguard Group, the largest, with a 10.3% stake; Morgan Stanley Investment Management, with an 8% stake; and BlackRock Fund Advisors, with a 4.6% stake.

Ark Investment Management, led by Cathie Wood, a star of the Reddit investing community who has previously bet on Musk, has a 2.15% stake. Jack Dorsey, who is friendly with Musk, has a 2.2% stake. Twitter’s board, which includes Dorsey, voted unanimously to approve the poison pill.

Musk seemed to be girding for a protracted fight Thursday.

“Taking Twitter private at $54.20 should be up to shareholders, not the board,” he tweeted, alongside a Yes/No poll.

Musk’s initial, bare-bones offer left open significant questions. Musk has hired Morgan Stanley to advise on the bid, although the investment bank is not known for financing large-scale deals on its own. And Twitter shareholders seemed wary: Twitter’s stock fell almost 2% Thursday, closing at $45.08 — significantly below Musk’s offer. Stock markets in the U.S. were closed Friday for the Good Friday holiday.

Prince Alwaleed bin Talal of Saudi Arabia, who described himself as one of Twitter’s largest and most long-term shareholders, said Thursday that Twitter should reject Musk’s offer because its was not high enough to reflect the company’s “intrinsic value.” Analysts also suggested that Musk’s price was too low and did not reflect Twitter’s recent performance.

Musk argued that taking Twitter private would allow more free speech to flow on the platform.

“My strong intuitive sense is that having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization,” he said in an interview at the TED conference Thursday.

He also insisted that the algorithm Twitter uses to rank its content, deciding what hundreds of millions of users see on the service every day, should be public for users to audit.

Musk’s concerns are shared by many executives at Twitter, who have also pressed for more transparency about its algorithms. The company has published internal research about bias in its algorithms and funded an effort to create an open, transparent standard for social media services.

But Twitter balked at Musk’s hardball tactics. After a Thursday morning board meeting, the company began exploring options to block Musk, including the poison pill and the possibility of courting another buyer.

During an all-hands meeting Thursday afternoon, Twitter CEO Parag Agrawal sought to reassure employees about the potential shake-up. Although he declined to share details about the board’s plans, he encouraged employees to stay focused and not allow themselves to be distracted by Musk.

This article originally appeared in The New York Times.

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