马斯克收购Twitter完整解读 | 毒丸计划, 恶意收购, Poison Pill, Tender Offer

On April 25 The world's richest man Elon Musk and Twitter reached a preliminary agreement Musk will pay $44 billion to acquire Twitter and privatise it Look how fast Musk moved In less than a month he managed to finalise a big deal But what I find most interesting in this case is not the business logic behind it For example why did Musk want to acquire Twitter what’s in it for him?

Should Twitter accept?

All these questions The part that interests me most it that Twitter in order to resist Musk’s acquisition initiated something called Poison Pill strategy The name sounds interesting right?

Like writing a novel In fact it is particularly important and effective means in the capital game A lot of companies use this method to fend off hostile takeover Today we use the case of Musk and Twitter to talk about this Why do you think there’s a hostile takeover?

How does it work?

How to resist a hostile takeover And what exactly is Poison Pill?

Once you understand these methods understand the underlying logic of both sides then you can see clearly this capital game Let me briefly explain Musk’s case If you are not interested in this and only want to listen to important part you can skip to this part (minute 3:14) Twitter, a social media platform It’s similar to China’s Sina Weibo About 10 years ago they experienced the golden age of development for social media platform They were listed in 2013

How’s their development after that?

Just look at the price of US Stocks Large cap has increased 150% but Twitter is the same as it was 8 years ago moving between that price range It really start high and end low This year, on 4th April Musk submitted a document to SEC and publicly announced that he had purchased 9.2% of Twitter’s shares More than 70 million shares valued at $2.9 billion All of a sudden he becomes largest shareholder of Twitter

The market welcomed the news They thought Twitter was already hopeless suddenly the richest man in the world is investing good news good news The stock price rose by 27% that day The board of director was happy too The big influencer is in charge Twitter finally can shake off the sloppy image Ah big boss please come in, come in, welcome They hold out an olive branch to Musk invited him to enter the board under one condition

Musk’s shares must not exceed 14.9% Originally it seemed like a good thing for both parties But on Musk's side he suddenly said No Thanks Then for the next few days on 15th April he submitted another document to SEC and announced that I, Elon Musk will buy at the price of $54.2 per share all the stocks of Twitter and privatise it He also said It’s a one time offer Think clearly, if you don’t sell

I’ll have to reconsider to sell the 9.2% of shares in my hand Musk offered $54.2 Which is 38% higher than the closing price on 1st April Sounds quite enticing When it happened the entire Twitter board was shocked When it’s out the entire Twitter board was shocked the entire world was shocked If there’s some hedge fund manager If there’s some hedge fund manager like Carl Icahn then okay it’s fine

But this is the richest man in the world and Musk is also a big influencer on Twitter Still quite amazing Next day Twitter announced that they will initiate Poison Pill strategy Poison Pill is incredible In history no one has ever been able to swallow it whole With such a big murder weapon everyone thought Musk is now in trouble It’s either going to be a long war or he might just withdraw

No one expected that after one week Musk and Twitter reached an agreement Are you a little confused?

What exactly is going on?

Didn’t you say the Poison Pill is incredible?

How did Musk acquire Twitter successfully?

This requires you to understand the game between the acquirer and the acquiree and what exactly is Poison Pill plan Don't worry. Let's take it one step at a time

Don't worry. Let's take it one step at a time to build up the knowledge First let’s talk about acquisition If a person or a company would like to acquire another company for example, me, Lin like a company Lao Wang Tea Shop I want to acquire it and open a tea shop So both sides sit down and negotiate If both sides think the price is suitable agreed on it that’s an easy deal, this is called friendly takeover

This is what happened mostly What’s interesting is in another situation if the board of Lao Wang Tea Shop doesn’t want to sell because either they think the price is low or the board is too nitpicking They feel like they’ve finally taken control of a company they just don’t want to sell it No matter which situation, they just don’t want to sell If Lin is more radical

This is the time where I’ll think of all the possible way to carry out forced acquisition This is called hostile takeover To put it bluntly, both sides didn't come to a term Some ask If they are not willing to sell How can I acquire it forcefully?

At this point, the discussion will depend on the situation If this tea shop Lao Wang holds 100% of the share, then there’s nothing more you can do If he doesn’t want to sell even if I have $10 billion, I still can’t do anything But, assuming Lao Wang Tea Shop is a joint-stock company especially if it has been listed It will have board of directors and normal shareholders

What’s inside the mind of each shareholder will be different right So the board cant decide everything Now, there’s some room to work here Board of directors and normal shareholders they are different We have to clear on this Board of directors is a small group of people chosen by all shareholders to represent all the shareholders to make some major decisions For example they have to monitor the management or regarding mergers and acquisitions

they are the one to make decision But the members of the board doesn’t necessarily have to be large shareholder For instance The founder of Twitter, also a board member he holds the largest share 2.4% of the shares the rest of the members hold less than 0.3% in total The entire board holds less than 3% of shares in total Okay, let’s continue If I wanted to forcefully acquire Lao Wang Tea Shop or Musk

want to forcefully acquire Twitter What to do?

If the board disagrees The direct method would be to bypass the board I could, as much as possible secretly buy the shares of Lao Wang tea Shop Either I buy it openly in the market or I buy it from large shareholders Anyway, I’ve bought more than 51% So I have the majority say during a vote Now the board disagree right I can dismiss and vote the board out and vote in my people

Basically from now on I can do whatever I want Of course there’ll be some special terms and conditions For example when there is very special or important decision to make more than 70% of the board has to agree on these special circumstances Let’s set this aside first The secretive large volume buying is called Creeping Tender Offer I don’t see a better translation One of the most famous case was in 2008 Porche wanted to forcefully acquire Volkswagen

They started to secretly acquire Volkswagen’s shares when they were close to acquiring more than 50% when they thought they could finally swallow this big elephant the 2008 financial crisis broke out their financial chain broke first Instead Porche was acquired by Volkswagen With this method If you want to secretly but 51% of the shares is actually quite difficult because most people they don’t necessarily want to sell and once you’ve been discovered

the company that was about to be acquired the board and their shareholders will definitely use various method to counterattack right we’ll talk about the counterattack later don’t worry Since it’s so difficult to secretly buy shares is there any other easier or cleverer ways to do this?

Well of course. It depends on effort You don’t really have to actually acquire 51% shares you just have to handle the board I could use various means to change half of the board members of Lao Wang Tea Shop and put my people in Then, we all can reach a consensus to get rid of those who are disobedient and bring in those who are obedient Then this board will just act as how I want it to be

This is the second trick Proxy Fight Proxy Fight I think the better translation would be Outsmart the Board In US capital world There is a hedge fund manager feared by the people Carl Icahn He is especially good at hostile takeover And one of his best tricks is to outsmart the board It’s a bit like political struggle It doesn’t necessarily mean you need to have absolute control in the board

but one more seat will get you more right to speak it’s all in the game The second method might sounds idealistic But think about it, you need to have certain finesse It’s actually very difficult So there’s a third method to takeover Lao Wang Tea Shop called Tender Offer Tender Offer What does it mean? I'll bypass the board and publicly announced to the public shareholders Brothers, Now I want to acquire Lao Wang Tea Shop

the current market price is $100 I’m willing to offer $150 to buy the shares in your hand Those willing to sell can come to me Within the public shareholders there must be those who think the price offered is not to bad and they’ll come to me and make a deal When my shares achieve 51% it will go back to the one we mentioned Lao Wang Tea Shop will be mine Some ask

Suppose I don’t get enough 51% people to sell to me What to do Here’s the interesting part Follow me tight Let me ask a question If I get 51% of the shares What will happen?

Since I possess more than half of voting right then it’s easy right Get my own people inside and kick out those who are disobedient Now I can propose that the balance 49% of shareholders who didn’t sell before now it’s been decided that you have to sell the shares in your hand at the price of $80 to Lin If you disagree then we vote You have to sell even if you’re not willing to sell

Now you being the 49% shareholder you just fell apart When the price was at $150 I didn’t sell Now I have to be forced to sell at $80 I’m at a loss now Now you regret not selling it at the time Assuming we return to the time when it was $150 during the Tender Offer What would you do?

Even if I’m not willing to sell As long as there are 51% of people willing to sell to Lin She’ll control the company I’ll become the poor 49% The consequences would be terrible So now I don’t care anymore I’ll just sell it fast This Tender Offer not a lot of people actually willing to sell but because they are worried that the acquirer upon gaining the control of the company will oppress and exploit them

so they panically choose to accept this tender offer Tender offer might seems open and just but actually it becomes hostile takeover Compulsory Acquisition This dirty technique was widely used This dirty technique was widely used Of course, its actual operation and supervision will definitely be much more complicated But I want to be clear on the concept and logic Why tender offer is actually a compulsory acquisition Interesting right?

The acquirer can adopt some strategies basically the 3 methods mentioned using various permutations and combinations can lead to a hostile takeover of a company And of course you need to have money The defender or acquiree that is Twitter or Lao Wang Tea Shop Do they just let people exploit them?

Is there any way to deal with it?

This brings us to one of the most commonly seen in recent years also the most effective our topic of the day We’ll use Twitter as example to talk about What is Poison Pill The agreement provides that Any person who does not have the permission of the board acquire more than 15% of Twitter’s shares All the other persons shall unlock a right which is they could use half of the price to buy more Twitter’s shares

The newly bought shares and the shares bought before shall share the same voting right The validity of this right is one year A bit obscure right?

What does it mean specifically?

This means that if there’s any person the target must be Musk right If Musk possess more than 15% of shares all other persons will unlock double skill You can buy Twitter stocks at a discounted price and increase the volume of your shares Subsequently Musk’s shares is diluted Some Poison Pill plan are even more direct It’s more than just discount If someone possess more than 15% Each of the 85% will get a share for free

The main aim is to dilute Musk’s shares so we wont have the control right Musk finally bought 15% shares With one bite of Poison Pill, his shares drop to 8% Technically Poison Pill can be used repeatedly Your shares increase, I’ll let yours drop You buy more, I’ll let yours drop again You can never have the control right You see just like it's name a Poison Pill If you force yourself upon me

I’ll let you have a taste of poison pill You're gonna get nothing out of it This poison pill strategy is rather incredible right?

But it’s too incredible is it legal?

Someone made an open and fair offer to acquire you but you are being perverse by getting poison pill Is this thing even legal?

That’s right it is legally protected Mainly because In the 1970s and 1980s The US capital market was extremely open lack supervision If some companies their stock price was at the bottom There’ll be some big capitalist would buy in large volume and gain control right Then they tear apart the company keep the high quality assets and sell off the rest and get some short term earnings This makes market unstable Therefore in 1982

There was a very smart lawyer invented Poison Pill strategy Actually at the time even he didn’t know if this could be legally protected Unexpectedly Delaware Supreme Court supported him Of course, the board has to be able to prove the acquirer has intention on hostile takeover and that he is not maximising shareholder interest or is unfair towards all shareholders only then the board can initiate Poison Pill strategy to counterattack With Poison Pill plan the board will gain

an invincible token how invincible you say From the moment of its birth except for a special case in 2008 used a loophole in this Non of the acquirer in the world can go against Poison Pill strategy Since it’s so useful, there are many companies start to adopt the plan to resist hostile takeover For example in 2001, Yahoo scares away Microsoft In 2005 Sina scares away Shanda In 2012, Netflix scares away In 2012, Netflix scares away

the big bad wolf of hedge fund, Carl Icahn All of them used Poison Pill In the early 2000, in S&P 500 more than half of these companies have Poison Pill strategy to resist the attack of intruders With such big murder weapon wouldn't the board be invincible?

No one can exceed 15% or if someone wants to acquire I can never acquire Lao Wang Tea Shop That's not necessarily true Under normal circumstances There are two ways to resist poison pill First method, since it’s hard to break through the resistance I'll find another way to circumvent it In the beginning we mentioned that There is a prerequisite for Poison Pill plan When the board disagree for me to have more than 15%

only then the Poison Pill initiates I have to to work out a way to deal with the board Basically, I'm going to outsmart the board again disintegrate the enemy from within then cancel the Poison Pill plan and complete my acquisition Second method If I can’t outsmart the board cant fight them, can’t pull them close, what to do?

This time I can choose to file a lawsuit I can sue you Since I can't handle you on my own I can find a third party find a court to judge We mentioned that the condition to use Poison Pill is that the board has to prove that there is hostile takeover I have to find a way to declare I have no ill intention My offer is the best offer in the world it's the offer that maximised

the interest of shareholders Not only you disagree and you threaten me with Poison Pill You only wanted to keep your position you didn’t perform your duty In such circumstances let's say that I'm making a very valid case I can prove to the judge that this is the best plan The judge may rules against the board and cancel the Poison Pill Of course during legal proceeding I can say I’m right

the board certainly can argue their case too they have to give evidence to prove that the price is not the best price or that someone else offers higher price to acquire, etc. Of course the court and shareholders doesn’t wish to see the board to keep using Poison Pill just sit back and say whatever they want to say So Poison Pill strategy is not a once and for all solution It’s mostly use to delay time

For example I can negotiate or find other buyers For instance, Oracle Oracle in 2013 wanted to spend $5.1 billion to acquire a company called PeopleSoft PeopleSoft You don’t have to know what PeopleSoft business is Anyway PeopleSoft initiated Poison Pill Alright Oracle If your shares is more than 20% I’ll initiate Poison Pill to dilute your shares Oracle couldn’t do anything about it Both sides started to negotiate Finally at the price of $10.3 billion

they agreed on the acquisition That's more than the $5.1 billion initially offered It's doubled This is a very successful application of Poison Pill Another example, in 1999 LVMH wanted to attempt a hostile takeover on GUCCI Gucci also initiated Poison Pill to buy themselves some time Then they found a knight in shining armour PPR, Kering Group’s predecessor to acquire them Let’s look back at Musk case He was, at the time when no one has prepared for anything

suddenly announced I want it all at the price of $54.20 I’ll give you a few days to consider selling You better decide fast Other matters like what I’m going to do to Twitter after I bought it including the money I use to buy Twitter where I’m going to get it from. He said nothing A big company like Twitter The board can’t just because you are the richest man in the world

and that the price is not too bad I’ll sell it to you It doesn’t work like this It’s obviously irresponsible towards shareholders They’ll be sued Facing so many uncertainties They immediately initiate Poison Pill with one year duration They aimed to buy more time. With this one year I’ll have enough time to discuss or negotiate with Musk or open for bidding to find other buyers Anyway, it’s to find a better solution Don’t get caught up with

Musk’s tender offer and bought over by Musk in confusion A week later after thorough investigation by the board they realized that Musk is serious Although he has made jokes like this few times before This time he actually has prepared over $40 billion to acquire Twitter Second, Twitter is indeed in a dire state They needed someone like Musk to give the company a shock Moreover Twitter, which is having a hard time for an Internet company

a 40% premium is actually very good for them They has just initiated the Poison Pill plan then not long after, the board pass the acquisition unanimously For musk’s acquisition plan once the board agrees on it the original hostile takeover becomes friendly takeover However it’s quite bad for Tesla’s shareholders the stock price plummet Poison Pill is used by company to resist hostile takeover And it’s one that’s being commonly used There are other methods

with very cool names There’s one that is the wimpiest called Greenmail To put it bluntly Okay I’ll give you money I’ll buy back the stock you already bought at a higher price Just let me go There’s another one that’s fierce called Pac-Man Defense It basically means that If you eat me, I’ll eat you if you start a hostile takeover on me I’ll start it on you There are others like Macaroni defence Lobster Trap defence Golden Parachute

In essence Although both offensive and defensive sides own powerful weapons but there’s no one method is the absolute best Ultimately you have to look at whether the acquisition plan the interests of the shareholders are protected to the greatest extent These weapons may sound fancy But most of it is just bargaining chip for negotiation and game between both sides