Poison pill – Twitter under siege

Twitter has put in the classic poison pill defense: a “shareholder rights plan” that will dilute Twitter stock. The board of directors is risking this, just to stop Elon Musk from buying the company or a controlling interest. As long as this rights plan is in place, buying out Twitter becomes an order of magnitude more expensive. But it also exposes the company legally, by diminishing shareholder value, at least short-term.

Current state of the Elon Musk and Twitter war

Regular readers should review earlier articles about the warfare between Elon Musk and Twitter. Recall what has happened:

1. Elon Musk disclosed that he owned 9.2 percent of the company.
2. Twitter offered him a board seat, on condition that he not buy more than 14.9 percent of the company. He refused.
3. He then offered to buy all outstanding shares for $54.20 US, cash.

Twitter has an independent Board of Directors, few members of which actually own Twitter stock. Nevertheless, they have an ideological imperative to keep Twitter running as it now does. So does at least one shareholder (Kingdom of Saudi Arabia) and possibly some institutional investors.

Lists of the top ten shareholders (other than Elon Musk) do not even agree. CNAV has found three of them, from CNN, MarketScreener, and Yahoo! Finance. From these and other sources, CNAV has put together this best list of stakeholders (other then Elon Musk). In rough order of decreasing stake, they are:

1. Vanguard Group
2. Morgan Stanley
3. Black Rock
4. The Kingdom of Saudi Arabia, including the king and various princes
5. State Street Global Advisers
6. Lone Pine Capital
7. Aristotle Capital Management
8. Fidelity
9. ARK Investment Management
10. ClearBridge
11. Geode
12. Barclays

That’s actually a top twelve list, reflecting everything consistent across the lists from the three sources. Note that CNN mentions a “Nikko Asset Management.” Wells Fargo once owned that – and then sold it to Barclays.

The sum of these twelve stakes amounts to about 48 percent – or perhaps more.

How the poison pill works

Twitter described its poison pill – the shareholder rights plan – in a press release. The phrase shareholder right, like so many phrases in high finance, has a special meaning. In this case it means the right to purchase additional shares which the company shall issue, at a discount. Whenever any individual, company, or other “entity” (another special-meaning word) acquires 15 percent or more of the company, every other shareholder of record has the right to buy more shares of common stock – at fifty percent off the market price.

So Elon Musk would have to pay full price. Everyone else would pay half price – if they want to pony up for more shares.

As the press release says, this poison pill defense is a classic. But Twitter says another thing about its poison pill that strain credulity.

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 or without providing the Board sufficient time to make informed judgments and take actions that are in the best interests of shareholders.

In other words, Twitter’s board just accused Elon Musk of trying to:

1. Buy out the company on the cheap, and
2. Rush the Board into a hasty decision.

Neither thing is true. Twitter closed, before the Good Friday holiday, at $45.08 per share. Even its after-hours price does not come near the $54.20 Elon is willing to pay.

Is the poison pill worth it?

CNN quotes Mr. Dan Ives at Wedbush Securities as saying:

1. Elon Musk surely knew a poison pill was coming, and
2. Musk could take the board to court, if he could get other shareholders to join him.

If Musk tried to gather proxies to force a shareholder vote, he might not win. CNAV estimates, again, that the Top Twelve non-Musk stakeholders already have 48 percent of the company. They could have a controlling interest among them. Interestingly, Morgan Stanley and one or two other stakeholders had lately sold some of their stakes. That could indicate that they’re not interested in any ideological imperative to keep Twitter as the electronic public square with gatekeepers.

Or it might mean nothing. But Musk does not need a majority to go to court to challenge the poison pill defense. The other stockholders likely represent many more entities, most of whom will be individuals. They’re not interested in any ideological imperatives; they just want a return on investment. The poison pill threatens that, so they might sue on that ground alone.

Where do we go from here

As CNAV mentioned earlier, commentator J. D. Rucker remains skeptical of Elon’s motives. How interested can he really be in freedom of speech, Rucker asks, if he builds a factory in Shanghai? More to the point, Rucker thinks Musk is just putting on an act, and is really a servant of the New World Empire.

If he is not, then we have Andrew Torba’s “offer” to him to invest in the Gab empire. Torba hopes to replace Twitter. That might or might not be important. Musk observed that Twitter seems to be dying, because so many top ten accounts show little to no output.

That does leave an option CNAV itself mentioned. If 2.4 million activists spent five or six thousand dollars as soon as the markets reopen, bought a hundred shares each, then gave their proxies to Elon, he would have a controlling vote immediately. The question is whether that many shares will remain available. They might not. But anyone who did manage to buy a hundred shares, would have standing in court over the poison pill.

Bottom line: Elon Musk must decide whether to take over an established brand, or join forces with the willing owner of a new brand. Those of us who care about free speech need to make a decision of our own.