During the first few months of 2022, billionaire Tesla CEO Elon Musk quietly spent over $2.6 billion buying up Twitter stock.
As a result, he now owns over 9% of the company’s stock — and now he’s vying for the other 91% as well. Last week, in a letter to Twitter’s board chairman, he offered up another $43 billion for the remaining shares.
Twitter’s board, however, had other plans: In a filing with the US Securities and Exchange Commission, the board embraced a so-called “poison pill” defense, formally known as a “shareholder rights agreement.”
The concept is used by public companies to avoid being acquired against their will, and it works by making the target company more expensive. The company issues new shares that are available to current shareholders, excluding Musk, that are worth double the price they cost.
The result is more discounted shares flood the market, thus diluting an acquirer’s original stake.
Though Twitter has yet to formally respond to Musk’s offer as of Friday, he said, the poison pill filing marked the official end of the “friendly” takeover process.
So, what is a “hostile takeover?”
Formally, hostile takeovers begin when negotiations break down between an acquirer (Musk, in this case) and a publicly held company’s board of directors.
One recent example of a friendly takeover — albeit one that’s still going through the regulatory approval process — is Microsoft’s $69 billion acquisition of Activision. Microsoft worked directly with Activision leadership and its board of directors, which approved the terms of the deal before anything was officially announced.
In the case of Elon Musk and Twitter, the situation played out very differently.
After revealing a large stake in Twitter earlier this month, Musk was subsequently appointed to the board of directors — which he initially accepted before walking back that acceptance days later. A few days after that, Musk appealed to Twitter’s current board with a $43 billion offer to buy the company.
Alongside the offer was a letter from Musk to Twitter’s board chairman Bret Taylor, in which Musk declared the offer to be his “best and final” offer.
“I am not playing the back-and-forth game. I have moved straight to the end,” Musk wrote in his letter to Taylor.
Twitter’s response was to file for a shareholder’s rights agreement, which Musk in turn responded to this week: On Thursday, in a regulatory filing, Musk confirmed agreements from banks and other entities “committing to provide an aggregate of approximately $46.5 billion” to buy Twitter.
Beyond proving that Musk has the capital to afford Twitter, it enables him to use a classic hostile takeover tactic known as a “tender offer.”
The “tender offer” approach
Rather than dealing with the board at all, Musk can appeal to shareholders directly by offering them cash for their stock at a higher price than it’s currently worth on the market. He’s repeatedly hinted at using a tender offer through coy tweets in the past few days.
—Elon Musk (@elonmusk) April 20, 2022
Should that not succeed, Musk has a few other potential tactics he could employ that are classic to hostile takeovers.
He could buy the remaining shares in Twitter that go up for sale over time, eventually amassing enough to either become the majority shareholder (over 50%) or to become a large enough shareholder that he’s able to make changes to the board.
That, and variations thereof, is known as a “creeping tender offer.”
Another option: Musk could team up with other large Twitter shareholders, like the Vanguard Group, to vote out the current board and replace them with board members who are friendly to Musk’s takeover bid.
That tactic is known as a “proxy fight,” and it enables investors in a public company to use collective action to force a company’s board to do something it’s resistant to doing.
Thus far, though, it appears Musk’s weapon of choice in his hostile takeover attempt is a tender offer. His initial offer to Twitter’s board was $54.20 per share — just shy of $6 higher than the $48 per share Twitter was trading at as of Friday afternoon. It’s unclear if that offer will change if and when Musk appeals directly to Twitter’s shareholders.
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