Poison Pill Explained: Why Elon Wants to Buy TwitterIn this post, I'll explain the ongoing situation with Twitter; how they're preventing Elon from buying the company out, and my thoughts on why Elon wants Twitter so badly.
Twitter's Strategy
- Twitter is using a strategy known as the 'poison pill'.
- This is one of many defensive strategies that boardrooms can take when they're trying to prevent hostile takeovers.
- While the method may vary depending on the deal, the essence of the strategy is simple: make the stock less appealing to the hostile acquirer, and allow opportunities for other shareholders to acquire the stock at a discounted price through the use of call options.
- Netflix (NFLX) successfully used this strategy against Carl Icahn in 2012, when he attempted a hostile acquisition of the company, making it difficult for Icahn to acquire more than 10% of the company without approval from the Netflix board.
- Luckily for Icahn, he made 20x returns on his investment simply from holding Netflix shares for the three years that he attempted a takeover.
- In the case of Elon's acquisition of Twitter, the terms are slightly different.
- Elon offered to buy the entire company for $43B, which is a generous offer of $54.20 per share.
- Twitter's board however, having seen prices once hover above $70, were not happy with Elon's offer, and asked him to join the board with a 14.9% stake limit - Elon refused.
- Twitter emphasized that their poison pill strategy will activate if Elon tries to acquire more than 15% stake in the company, and will remain effective until April 14, 2023.
Twitter Shareholders by Size
- The Vanguard Group, Inc. 10.3%
- Elon Musk 9.2%
- Morgan Stanley Investment Management 8.4%
- BlackRock Fund Advisors 6.5%
- State Street Corp. 4.5%
Why Elon Wants to Buy Twitter
- My thoughts on why Elon is looking to acquire Twitter is as follows:
- The narrative that Elon is pushing as his justification for the purchase is "free speech".
- He has been vocal about Twitter's decision to shut down former US president Donald Trump's account.
- However, I personally believe that there are deeper layers to this matter than just 'free speech', and 'twitter's untapped potential'.
- Tesla currently does not spend a single dime on marketing and advertisement costs.
- Elon dissolved the PR department in 2020, and stated that the capital that was previously used for marketing, will now be reinvested back for R&D.
- Instead, Elon has been using his twitter account as a channel to promote his businesses - not only Tesla, but also SpaceX, SolarCity, and the Boring Company.
- The last time Tesla had a PR department, it spent $70m in marketing and advertisement costs.
- So taking that into account, and considering the value that was created by those costs being reinvested back into R&D, Elon has singlehandedly managed to create hundreds of millions of dollars in value through his twitter account.
- And the risk of him having his twitter account shut down, due to his potential violation of one of their many policies, is huge.
- His acquisition of the company's stake, and taking the company private eliminates this risk for him.
- Put into context, it makes more sense: Elon's $43B offer to buy Twitter is equivalent to someone with a net worth of $1m purchasing a G-wagon for their rental car business.
Conclusion
On one hand, we have Twitter, a company willing to use the poison pill strategy to prevent a hostile acquisition from taking place, and on the other hand, we have Elon Musk, who's trying to take the company private for $43B. I think there are bigger implications to his offer, as we've seen how he was able to connect seemingly unrelated businesses to form a virtuous cycle that would become the pillar of his entire empire. We use electricity generated from SolarCity to power our Tesla cars using solar energy. With the satellites that SpaceX launches, our Tesla cars undergo software updates in real time, and the Boring Company solves traffic jam issues by taking our Teslas through underground tunnels. I'm sure there's room for Twitter to fit into this equation, but I'm not completely sure as to what Elon has on his mind. One thing is for sure: it has more to do with Elon's personal philosophy.
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