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Headlines recently broke about Elon Musk vying to buy Twitter for about 54 per share – well above Twitter’s current stock price.
Twitter’s board of directors adopted a poison pill plan which, taken out of context, sounds a bit dramatic.
People – seriously?
It was just a tweet.
So what is a poison pill and why are people in suits talking about them?
Sometimes companies buy other companies – they stage a takeover.
If that takeover is negotiated with the company’s board of directors, a company’s sold relatively drama-free, but if not it’s a hostile takeover.
Now companies might reject a takeover for any variety of reasons, even if the deal appears profitable and could apparently benefit shareholders.
It’s possible the takeover could fail – that’s a bad look.
There’s also other considerations like how employees will be affected or, in Twitter’s case, the user base – the Tweeters!
Protect the Tweeters!
Whatever it may be, one option companies have is a poison pill plan.
There’s no cyanide – a poison pill plan is pretty transactional:
If an investor, the one taking over the company, reaches a certain threshold of ownership – in Elon’s case, 15% – companies give their shareholders the right to purchase additional shares at a discount.
If Elon were to hit that 15%, Twitter would offer its shareholders the option to pay 210 dollars for 420 dollars worth of newly issued Twitter stock at the current market price.
With a deal like that, shareholders are bound to load up.
As more shares are issued, Elon’s ownership percentage would drop and to maintain that percentage, more money would be required.
Now his takeover starts to feel like taking a poison pill.
And people don’t talk about this: although the poison kills you there’s also like a really gassy bloated uncomfortable part.
You don’t want that.
The mere threat of a poison pill tends to be an effective defence.
The plans are actually rarely triggered, which can be a good thing:
Issuing more shares can dilute all of the other shareholders’ stakes, too requiring everyone to put more money in to maintain their stake.
Poison pill plans actually aren’t that unusual – about two percent of S&P 500 companies had poison pill plans as of April 2020.
In 2012, Netflix adopted a poison pill plan to fend off activist investor Carl Icahn who was potentially angling to pawn Netflix off to one of the tech giants.
Recently, Kohl’s joined the pill gang after some buyout offers, which they said (quote): “did not adequately reflect Kohl’s future growth”, reports Reuters.
Poison pill plans aren’t exactly spy movie levels of thrilling but they are effective tools in a company’s arsenal when facing a buyout that isn’t quite at the corner of happy and healthy.
Oh, that’s just iron.
This is a poison pill.
Oh wait, this is the same one…