{"id":29279,"date":"2022-04-18T23:37:00","date_gmt":"2022-04-18T23:37:00","guid":{"rendered":"https:\/\/www.lifeandnews.com\/articles\/?p=29279"},"modified":"2022-04-21T03:50:56","modified_gmt":"2022-04-21T03:50:56","slug":"do-poison-pills-work-a-finance-expert-explains-the-anti-takeover-tool-that-twitter-hopes-will-keep-elon-musk-at-bay","status":"publish","type":"post","link":"https:\/\/www.lifeandnews.com\/articles\/do-poison-pills-work-a-finance-expert-explains-the-anti-takeover-tool-that-twitter-hopes-will-keep-elon-musk-at-bay\/","title":{"rendered":"Do poison pills work? A finance expert explains the anti-takeover tool that Twitter hopes will keep Elon Musk at bay"},"content":{"rendered":"\n

Tuugi Chuluun<\/a>, Loyola University Maryland<\/a><\/em><\/p>\n\n\n\n

Takeovers are usually friendly affairs<\/a>. Corporate executives engage in top-secret talks, with one company or group of investors making a bid for another business. After some negotiating, the companies engaged in the merger or acquisition announce a deal has been struck.<\/p>\n\n\n\n

But other takeovers are more hostile in nature. Not every company wants to be taken over. This is the case with Elon Musk\u2019s US$43 billion bid<\/a> to buy Twitter.<\/p>\n\n\n\n

Companies have various measures in their arsenal to ward off such unwanted advances. One of the most effective anti-takeover measures is the shareholder rights plan, also more aptly known as a \u201cpoison pill.\u201d It is designed to block an investor from accumulating a majority stake in a company.<\/p>\n\n\n\n

Twitter adopted a poison pill<\/a> plan on April 15, 2022, shortly after Musk unveiled his takeover offer<\/a> in a Securities and Exchange filing.<\/p>\n\n\n\n

I\u2019m a scholar of corporate finance<\/a>. Let me explain why poison pills have been effective at warding off unsolicited offers, at least until now.<\/p>\n\n\n\n

What\u2019s a poison pill?<\/h2>\n\n\n\n

Poison pills were developed in the early 1980s<\/a> as a defense tactic against corporate raiders to effectively poison their takeover efforts \u2013 sort of reminiscent of the suicide pills that spies supposedly swallow if captured<\/a>.<\/p>\n\n\n\n

There are many variants of poison pills<\/a>, but they generally increase the number of shares, which then dilutes the bidder\u2019s stake and causes them a significant financial loss.<\/p>\n\n\n\n

Let\u2019s say a company has 1,000 shares outstanding valued at $10 each, which means the company has a market value of $10,000. An activist investor purchases 100 shares at the cost of $1,000 and accumulates a significant 10% stake in the company. But if the company has a poison pill that is triggered once any hostile bidder owns 10% of its stock, all other shareholders would suddenly have the opportunity to buy additional shares at a discounted price \u2013 say, half the market price. This has the effect of quickly diluting the activist investor\u2019s original stake and also making it worth a lot less than it was before.<\/p>\n\n\n\n

Twitter adopted a similar measure. If any shareholder accumulates a 15% stake in the company in a purchase not approved by the board of directors, other shareholders would get the right to buy additional shares at a discount, diluting the 9.2% stake Musk recently purchased.<\/p>\n\n\n\n

Poison pills are useful in part because they can be adopted quickly, but they usually have expiration dates. The poison pill adopted by Twitter, for example, expires in one year.<\/p>\n\n\n\n

A successful tactic<\/h2>\n\n\n\n

Many well-known companies such as Papa John\u2019s<\/a>, Netflix<\/a>, JCPenney<\/a> and Avis Budget Group<\/a> have used poison pills to successfully fend off hostile takeovers. And nearly 100 companies adopted<\/a> poison pills in 2020 because they were worried that their careening stock prices, caused by the pandemic market swoon<\/a>, would make them vulnerable to hostile takeovers.<\/p>\n\n\n\n

No one has ever triggered<\/a> \u2013 or swallowed \u2013 a poison pill that was designed to fend off an unsolicited takeover offer, showing how effective such measures are at fending off takeover attempts.<\/p>\n\n\n\n

These types of anti-takeover measures are generally frowned upon as a poor corporate governance practice<\/a> that can hurt a company\u2019s value and performance. They can be seen as impediments to the ability of shareholders and outsiders to monitor management, and more about protecting the board and management than attracting more generous offers from potential buyers.<\/p>\n\n\n\n

However, shareholders may benefit from poison pills<\/a> if they lead to a higher bid for the company, for example. This may be already happening with Twitter as another bidder \u2013 a $103 billion private equity firm \u2013 may have surfaced<\/a>.<\/p>\n\n\n\n

A poison pill isn\u2019t foolproof, however. A bidder facing a poison pill could try to argue that the board is not acting in the best interests of shareholders and appeal directly to them through either a tender offer<\/a> \u2013 buying shares directly from other shareholders at a premium in a public bid \u2013 or a proxy contest<\/a>, which involves convincing enough fellow shareholders to join a vote to oust some or all of the existing board.<\/p>\n\n\n\n

And judging by his tweets to his 82 million Twitter followers<\/a>, that seems to be what Musk is doing<\/a>.<\/p>\n\n\n\n

[Like what you\u2019ve read? Want more?<\/em> Sign up for The Conversation\u2019s daily newsletter<\/a>.]<\/p>\n\n\n\n

Tuugi Chuluun<\/a>, Associate Professor of Finance, Loyola University Maryland<\/a><\/em><\/p>\n\n\n\n

This article is republished from The Conversation<\/a> under a Creative Commons license. Read the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Tuugi Chuluun, Loyola University Maryland Takeovers are usually friendly affairs. Corporate executives engage in top-secret talks, with one company or group of investors making a bid for another business. After some negotiating, the companies engaged in the merger or acquisition announce a deal has been struck. But other takeovers are more hostile in nature. Not […]<\/p>\n","protected":false},"author":44,"featured_media":29280,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5,277],"tags":[11668,6674,11670,629,11669,2197,11667,11666,486],"_links":{"self":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/29279"}],"collection":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/users\/44"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/comments?post=29279"}],"version-history":[{"count":1,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/29279\/revisions"}],"predecessor-version":[{"id":29281,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/29279\/revisions\/29281"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media\/29280"}],"wp:attachment":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media?parent=29279"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/categories?post=29279"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/tags?post=29279"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}