Elon Musk spent the lion’s share of 2022 trying to buy Twitter.
That he was successful has everything to do with leverage and pressure (and, of course, some incredible M&A work).
This is how Elon Musk executed a near-perfect hostile takeover:
A hostile takeover is when one company–or person, in this case–attempts to take ownership of another company (the “target company”) when the board of the target company does not want it to happen. There are basically two ways to do this:
(1) Make a premium offer to the Board of the target, putting immense pressure on the Board from the shareholders to sell at that price, or
(2) Go directly to the shareholders & offer to buy shares directly from them.
In the end, Elon launched both tactics, within about a week of each other, and both tactics put immense pressure on the Board in different ways–so much so that the Board decided to sell Elon the company.
In mid-April, Elon fired his first salvo by making a premium offer to the Board to buy all of Twitter for $41.39 billion, or $54.20/share. In hostile takeover terms, this is called a “bear hug.” It’s still hostile, and it’s still a takeover, because the Board doesn’t want to sell to Elon. But the idea of a bear hug is to make the Board such a good offer that the shareholders will put pressure on the Board to accept it so they can get premium value out of their shares. Elon’s hope was that the offer would be so strong that the Board would either just accept it outright, or take it to the shareholders for a vote.
The Board did neither.
Instead, the Board enacted the “poison pill” defense.
A poison pill is an anti-takeover defense launched by the board of a target company that severely dilutes the stock of the target upon a triggering event, making the company less desirable to the potential acquirer. The Board, of course, did not call is a “poison pill,” but instead called it a “stock rights plan” or “shareholder rights plan.”
It’s the same thing. The Board issues a dividend distribution of stock or stock rights that have options for redemption. In Twitter’s case, the poison pill would be implemented if any person gained 15% or more of the company. In this case, if Elon would have bought 15%+, the stock options would vest. When the options are exercised by shareholders, this severely dilutes the stock of the target company—and the stock of the acquirer, Elon.
The idea, then, is that Elon wouldn’t go forward with the takeover because he wouldn’t be able to afford to trigger the pill. Some buyers do decide to swallow the pill (basically paying a premium for the stock), but this is risky: target can reload and implement a second poison pill.
Though none are perfect, there are a couple “counters” to the poison pill:
(1) shareholder pushback in the form of a resolution/bylaw outlawing the pill. This can take a long time & needs broad shareholder support.
(2) the “just take over the company anyway” approach. You usually need a lot of money.
Elon, not short on money, and ever the gamesman, decided on the latter, but assured himself that the former was a nice little fallback. Mere days after the poison pill was implemented, Elon decided he would–kind of–circumvent the pill with a “tender offer.”
A tender offer is just when the acquirer makes an open offer to the shareholders of the target to purchase the shares at a certain price. Though Elon did not technically offer a price to the shareholders, his SEC filing said that he was “exploring” the idea. So, instead of going to the Board like he did originally, Elon threatened to go directly to the shareholders and say “Hey, I’ll buy your shares at $54.20/share. Deal or no deal?” In doing so, he could slowly but surely gain control of the company.
So–while his first offer to the Board was still on the table–Elon ALSO went to the shareholders directly and said he’d be willing to buy their shares directly, with or without the Board’s approval.
The amount of pressure this two-pronged approach placed on the Board is almost impossible to overstate.
– Immense pressure to sell at the initial premium price, AND
– Pressure from millions of shareholders selling bit by bit & devaluing the stock (death by a thousand cuts)
By pursuing this strategy, Elon effectively mitigated the impact of the poison pill, saying to the Board: “sell your company to me, or it will become devalued to the point that you will be forced to sell. At that point, I’ll be waiting at the door w/ another (lesser) offer.”
In a word, brilliant.
Another third point of pressure was from the public itself. The situation was a PR nightmare for the Board, who appeared to be holding shareholders hostage by not selling at a premium price merely because of their distaste for Elon.
Cracks could be seen developing in the Board.
By summer, Jack Dorsey (Twitter’s co-founder & former board member) appeared to be at odds with other members of the board over the direction of the company.
The combination of the premium offer, with the tender offer to shareholders, with the mounting public pressure, ultimately became too much of a pressure cooker for a fractured Board, and they (allegedly) voted to sell the company to Elon. In a hostile takeover, you don’t need to win the first battle to win the war. Sometimes all that is needed is to create pressure, and keep mounting it from different angles, ultimately creating division and dissension between board/shareholders and within the board itself.
And then the house–even a house as large and powerful as Twitter–can fall like a deck of cards.
Dearden Law 