April 19, 2022
Twitter adopted a poison pill (i.e., a shareholder rights plan), that included a preferred stock purchase right, a flip-in right, and flip-over right, on April 15, 2022, a day after an investor offered to buy its remaining shares for $54.20 per share, for a total of more than $43 billion. Under the poison pill, if a shareholder acquires 15% of Twitter’s outstanding common stock without the board’s approval, the other shareholders will be allowed to purchase additional shares at a considerable discount. This kind of tactic is a common way to thwart off a hostile takeover attempt, but how exactly does it work?
The poison pill is widely regarded as the most effective anti-takeover defense available. Essentially, it is a call option to purchase securities in a target (flip-in pill) or bidding company (flip-out pill) at a steep discount. In Florida and in most states, directors are authorized to issue stock purchase rights without a shareholder vote. In adopting a poison pill, the board issues a purchase right for each share of stock outstanding. The right is only exercisable upon the bidder acquiring shares in excess of a specified percentage of total shares outstanding (in Twitter’s case i.e., 15%). Once exercised, the right allows all shareholders but the bidder to purchase shares of common stock at a considerable discount. For instance, a Twitter shareholder will pay $210 for securities worth $420.
As an illustration of the flip-in pill and using Twitter as an example, suppose a bidder acquires 15% of Twitter’s shares at a current market price of $45 per share. Now that the pill is triggered the rights are exercisable which entitles all shareholders but the bidder, to buy 9 new shares (i.e., $420/$45). As of February 10, 2022, Twitter has 800,641,166 shares of common stock outstanding. Therefore, under this scenario there are 680,544,991 shares that belong to the shareholders, excluding the bidder. The rights plan allows the non-bidder shareholders to purchase 6,124,904,919 (680,544,991 x 9) additional shares for a total of 6,805,449,910 shares. This dilutes the bidder’s ownership from 15% (120,096,175/800,641,166) to 2% (120,096,175/6,925,546,085) of the shares outstanding.
The bidder will also suffer economic dilution. After exercising the pill, the total equity value of the target is $178,943,300,580. This is calculated by taking the pre-trigger equity value of $36,028,852,470 (800,641,166 x $45) and adding it to the cash received from exercising the rights $142,914,448,110 (680,544,991 x $210). Now the shares are currently worth $25.84 per share ($178,943,300,580 / 6,925,546,085). As a result, the bidder has loss a total of $2,301,042,713 ((120,096,175 x $45) – (120,096,175 x $25.84)).
Finally, combining both the economic dilution of $2,301,042,713 and the added cost of acquiring the remaining shares $145,228,301,079.4 ((6,805,449,910 x $25.84) – (680,544,991 x $45)) sums to a total of $147,529,343,792.4. The poison pill makes the acquisition about 4.1x ($147,529,343,792.4/$36,028,852,470) more expensive than the current stock price.
The flip-in pill is the most common shareholder rights plan adopted by most corporations. Its objective is to (i) impose unacceptable dilution on the acquirer, (ii) motivate negotiation, and (ii) prevent coercive tactics such as front-ended two-tier tender offers. A front-ended two-tiered tender offer is coercive because the bidder offers an unfair initial offer, and if the bidder gains control it can essentially squeeze the minority shareholders out at a lower price.
An important feature of the shareholder rights plan is the board of directors’ right of pill redemption. This is a provision that allows the company to buy back the rights at a nominal cost before the bidder crosses the threshold. The purpose of the redemption is to provide the board with flexibility to respond to a hostile bidder who wants to negotiate. Proponents of shareholder rights plans argue that it motivates negotiations and succeeds in extracting higher prices from bidders. Twitter’s pill is redeemable for $0.001 per right.
The Poison Pill Anti-Takeover Defense: The Price of Strategic Deterrence, by Robert F. Bruner, DBA. Published by Published by The CFA Institute Research Foundation.
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