UPDATE – 1:20pm EST
Just moments ago, Twitter’s board voted unanimously to adopt a limited duration shareholder rights plan, otherwise known as a “poison pill.”
Now, if any person or group purchases at least 15% of Twitter’s outstanding common stock without the board’s approval, other shareholders will be able to purchase additional shares at a discount relative to the current share price.
The plan will expire on April 14, 2023. Read below for more on shareholder rights plans.
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With the market closed for Good Friday, investors had little to focus on this morning besides Elon Musk’s latest conquest. Or, more accurately, his latest conquest attempt.
Musk has yet to actually purchase Twitter (NASDAQ: TWTR) following stiff resistance from both the company’s boardroom and head executives. Twitter leadership seemed initially excited about Musk’s 9.2% stake in the company when it was announced early last week. Since then, however, that enthusiasm has completely faded as Musk’s new Twitter shares quickly became a bargaining chip in a hostile takeover.
It’s no secret that Musk is unhappy with the direction Twitter is going. To be fair, investors probably aren’t too pleased with it, either. TWTR shares fell over 60% from peak to trough after notching a new all-time high back in February 2021. It was a mostly bearish affair the entire way, marked by several “dead cat bounces” that ultimately saw TWTR retrace harshly each time.
And the stock’s most recent short-term rally, which began after Musk announced his massive TWTR investment, may turn into yet another frustrating head fake for bulls if Musk decides to sell – something he threatened to do should Twitter reject his bid.
“We believe this sets a near-term ceiling on shares, detaches the company from fundamentals, and offers significant downside rise if Mr. Musk decides to abandon his offer or sell down his stake,” explained Stifel analyst Mark Kelley, who stuck TWTR with a $39 price target. That’s approximately how much TWTR was trading for before Musk announced he had bought any.
As of today, Musk is still offering to buy the entirety of Twitter at $54.20 per share, which he noted was a “54% premium over the day before I began investing in Twitter and a 38% premium over the day before my investment was publicly announced” in his filing with the SEC.
But Musk’s offer apparently wasn’t enticing enough for Twitter leadership according to a morning report from Bloomberg, which cited sources close to the situation.
Twitter is currently trying to decide how to best defend itself, by either rejecting Musk’s bid outright or going the “poison pill” route, which involves making the company look less desirable to Musk through something called a shareholder rights plan.
A shareholder rights plan provides existing shareholders with the right to purchase additional shares at a discount. This typically dilutes the ownership interest of the hostile party (in this case, Musk), and it’s been a relatively effective strategy for companies in the past.
Netflix (NASDAQ: NFLX) famously used a shareholder rights plan to fend off activist investor Carl Icahn, who made a career out of leveraging large stakes in companies to change corporate policy for the benefit of shareholders. Icahn bought 10% of the company in 2012 and NFLX immediately went on the defensive.
If Icahn wanted to buy any more shares without approval from Netflix’s board, the shareholder rights plan would have flooded the market with new shares, thus making his purchase far more expensive.
This completely halted Icahn’s attempt to take control of the company. One year later, he dumped half his position, albeit for a profit of $800 million. He then sold the remainder for a massive gain, arguing that stocks market valuations were “too high.”
Icahn still made out like a bandit when the dust had settled. But Netflix also managed to keep him from changing the company’s vision by employing poison pill tactics, which ended up rewarding NFLX shareholders handsomely from 2016 to 2021 after Icahn called it quits.
But shareholder rights plans don’t always work. And, more importantly, they often limit a company’s share value in the short term. It also could be argued that poison pills protect underperforming members of upper management from disgruntled shareholders. In Twitter’s case, there are probably quite a few unhappy long-term TWTR holders, as the stock is still lingering near its debut price of $45.10 back in November 2013. IPO participants have nothing to complain about, of course, as they had a chance to buy the stock at just $26 per share.
But, overall, TWTR could certainly be seen as a long-term tech sector disappointment.
If shareholders want to make changes to upper management, a shareholder rights plan may limit their ability to do so until it’s “sunsetted,” which probably wouldn’t happen until Musk gives up the fight.
So, even though Musk’s purchase of Twitter seemed imminent yesterday, the truth is that he may have a long way to go before anything is final. Twitter’s board doesn’t seem to want to sell and neither does the C-suite.
That’s going to make things harder for Musk, especially if Twitter activates a shareholder rights plan to keep him at bay.
