With all this talk of Elon Musk taking over Twitter and Twitter’s poison pill strategy to thwart those plans. It made me think that maybe I should write this article to discuss exactly what a “poison pill” strategy actually is. As well as, how and when companies will invoke this strategy. Because it does not apply or work in every situation. With that said let’s first answer the first question What is a “Poison Pill”?
What is a “Poison Pill”?
Understanding what a Poison pill strategy is, is key to understanding this whole Elon Musk/Twitter battle. It’s not too difficult to wrap your brain around. In fact, it’s actually relatively straightforward. In essence, a poison pill strategy gives existing shareholders the right to purchase additional stock at a significant discount. Which will dilute the holdings of a new, hostile investor. The official name for it is a shareholder rights plan.
How does a “Poison Pill” Work?
So, in the case of Elon Musk and Twitter. Elon Musk has a total of 9.72% stake in Twitter shares. The Shareholder rights plan allows Twitter to issue more stock so that Elon’s stake in the company is decreased from 9.72% down to whatever it is now. This is a really good way to make it difficult for a company or an individual to hostile take over another organization. It is a way to provide the company and shareholders a defense against hostile takeovers.
When do companies utilize the “Poison Pill” Strategy?
Now that you know what it is, you might be wondering how and when you would deploy this strategy. Companies typically have a threshold in which the strategy will kick in. For instance with Twitter. Twitter’s strategy kicks in when anyone shareholder acquires more than 15% of the company shares. They then dilute those shares so that there stake is worth less than what it is now. Since 2000, companies as a whole have shyed away from this strategy because it made it seem like it was a way for Board members to keep their jobs. Not a good look for many companies. It is only used in the direst of circumstances. Kinda like this situation between Elon and Twitter.
That’s the Poison Pill Strategy! Now, when you go and read your daily article about Elon Musk taking over Twitter you now understand what everyone is saying. This article was made to provide you with the basics. So, always continue to learn more!
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