As Elon Musk announced his proposal to purchase Twitter as a large shareholder, Twitter has adopted the poison pill strategy to devalue his stocks. Can the poison pill strategy obstruct future sales with a major corporate company?
What Is The Poison Pill Strategy?
A New York-based law firm named Wachtell, Lipton, Rosen, and Katz developed the strategy in the 1980s. The strategy came as a measure to the public based companies that were immediately threatened with takeovers by corporates.
The poison pill gives the shareholders of the existing company protection against sudden ownership. At lower prices the shareholders buy shares of the company, diluting the absolute ownership to a new shareholder. Sometimes the strategy creates a space for the negotiation of terms and sales. If the bidder’s price is satisfactory to the boarding panel the sale is completed.
In 2012, Netflix utilised the strategy when they got to know that Carl Icahn had bought a 10% stake in the company. While in 2018, Papa John’s did not let John Schnatter, the ousted founder who had 30% of the equity ownership of the company by using the poison pill strategy.
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Two Types Of The Strategy
Flip-in poison pill: In this mode, the existing shareholders buy extra shares at heavy discounts, whereby they make immediate exponential profits. The new acquirer of the company cannot purchase the additional shares. The value of their already purchased stocks decreases. This is a famous strategy, even used by Twitter.
Flip-over poison pill: This defence measure allows the existing shareholders of the target company to buy shares of the new acquirer corporate company at lower prices. This measure devalues the stock price of acquiring companies.
Elon Musk And Twitter Saga
Elon Musk has 9.2% equity shares of Twitter. He has proposed to buy the company at $ 43.4 bn. He wants to democratise free speech and expression more by utilising the full potential of the company.
Twitter used the Flip-In poison pill strategy or as they say “Shareholders Rights Plan” which allowed the existing shareholders to buy shares at very discounted rates.
Twitter gave a statement, “The Rights Plan will reduce the likelihood that any entity, person or group gains control of Twitter through open market accumulation without paying all shareholders an appropriate control premium.”
The working employees of the target company are apprehensive about the sudden takeover by a private corporation which would disintegrate their vision of the company. CEO Parag Agarwal reassured the employees that their voice has more significance and that these takeover situations will not affect them.
Do you think Elon Musk will be able to buy Twitter? Will corporations have more power in the upcoming days?
Disclaimer: This article is fact-checked
Image Credits: Google Photos
Feature Image designed by Saudamini Seth
Source: The Guardian, The Indian Express & The Economic Times
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This post is tagged under: Twitter, Flip-In, Flip-out, poison pill, business, Elon Musk, Papa Johns, Carl, New York, shareholders, stocks, trade, sharemarket, Twitter against Elon Musk, poison pill strategy, Netflix
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