Twitter – What Elon Musk Should Do Now
Elon Musk, the CEO of Tesla Motors and SpaceX, had attempted a hostile takeover of twitter. Twitter board had rejected the offer of $54.20 per share of twitter amounting to total of $43 Billion. Twitter Board is now thinking of various defense strategies for Hostile takeover including Poison Pill. Before I analyze the various strategies and what Elon Musk should do now, I would like to gradually explain the readers the hostile takeovers, defense strategies and finally the options before Elon Musk.
Hostile takeovers are nothing new in the corporate world. The understanding of Hostile Takeovers is quite simple - acquisition of one company by another company against the wishes of the target company. The company being acquired in a hostile takeover is called the target company while the one executing the takeover is called the acquirer.
Hostile takeovers Versus Friendly takeovers: In Hostile takeovers, the Board of Directors of the Target company does not accept the proposal. In case of a friendly takeover is more conservative practice and common in the corporate world. The discussion happens between the parties in a friendly takeover and once the deal is finalized it is released to the press and the statuary bodies.
Are hostile takeovers legal? This question is at the top of everyone mind. Why should a hostile takeover be legal when the Board of Directors of the target company rejects the offer. But still the acquirer manages to stay within the legal parameters and exercise one of their strategies to acquire the target company. Hence, hostile takeovers are perfectly legal.
Tender offer Strategy: Tender offer strategy is one of the most common strategies in a Hostile Takeover. In this the acquirer makes an offer over the market valuation of the share of the target company. This offer of higher than the market price is called as “Bear Hug” in investment parlance. We can take the current example of Elon Musk offering to buy twitter. He has taken to this strategy in the hostile takeover attempt. He has offered $54.20 per share of twitter amounting to total of $43 Billion. According to Elon Musk this offer of $54.20 per share is 54% premium over the day before he began investing in twitter and is 38% premium over the day his investment was made public. He further threatened to pull out his investment if his offer was not accepted. This strategy of offering over the market value is called as the Tender strategy.
In this strategy the acquirer offer is conditional to the fact that he should get enough shares of the target company to have a controlling interest. If he does not get enough shares at the tender price then the acquirer will withdraw the tender.
Creeping Tender Offer Strategy: This is just a variation of the tender offer. In this the acquirer still aims to get the majority stake in the target company. The acquirer will simply start buying more and more shares of the target company’s stock from the open market. The acquirer keeps buying until he has accumulated enough shares to become the majority shareholder. This is the cheaper option for the acquirer as he keeps buying only at the market rate. But the cons are the target company management will come to know of this strategy and will put blocks so that the acquirer does not get the majority shareholding.
Proxy Vote Strategy: In this strategy the acquirer company persuades the existing shareholders of the target company to vote out the management team. In the same example that I mentioned above - Elon Musk and twitter - twitter is the target company and Elon Musk is the acquirer. Now since, the management team of twitter has refused the offer of Elon Musk as an acquirer Elon Musk can persuade the major shareholders of twitter to vote out the management team who had refused his offer to buy out. The goal of this strategy is to remove the board members opposing the takeover and to install new board members who are more receptive to change in ownership - the new board members will approve the takeover.
Hostile takeover defenses: In the corporate war, the target companies usually adopt various strategies to defend hostile takeover attempts. The target companies implement different strategies to deter the takeover bid by the acquirer company.
Poison Pill approach: This approach is adopted by the target company when they issue more shares to the current shareholders of the target company at a discount to make it less attractive. This will increase the number of shares of the target company thus diluting the shareholding and making it more costly to the acquirer. In the Elon Musk and twitter tussle, the twitter board is toying with the idea of exercising Poison Pill strategy and diluting the shareholding by offering more shares at a discount to the existing shareholders.
Golden Parachute strategy: The target company enters into employment contract with key management stating expensive benefits if they are removed from the company following a takeover. This again makes the takeover expensive for the acquirer.
Crown Jewels defense: In this the target company usually sells the most value parts of the business or the company. This deters and makes it less attractive to take over the target company.
Supermajority amendment: The company’s charter are amended requiring substantial majority of say 70% and above of the shares to vote to approve a merger or a takeover.
Greenmail: In this strategy the target company repurchases the shares of the target company held by the acquirer at a premium. This prevents or dilutes the shareholding of the acquirer held in the target company.
Pac-Man defense: This is an aggressive strategy adopted by the target company. It attempts to takeover the acquirer company through various attempts. The acquirer company drops the plan of takeover as it is in threat of losing its own shareholding in its own company.
There are many examples of hostile takeover in the corporate world. AOL’s hostile takeover of Time Warner in 1999 is a famous example. In India, too we have seen various attempts of hostile takeover. The attempt of L&T to takeover Mindtree is an example of hostile takeover attempt. In 1983 London based Swaraj Paul attempted a hostile takeover of Escorts Limited and Delhi Cloth Mills (DCM) by picking their shares from the stock market. Paul retracted his bid Later on.
Hostile takeover through Tender offer is good for the shareholders of the target company as they are offered price higher then the prevailing market rate. But this is not a good corporate policy and in the long run it is not good for the market as it is money power barging into small businesses.
Now having analyzed the hostile takeover strategies and defense strategies let me now analyze what options Elon Musk has. Elon Musk has exercised tender offer strategy. He has to try to get other major shareholders into his fold. Elon Musk has about 9.2% shareholding in Twitter. Vanguard Group has over 10% shareholding in twitter. Elon Musk should explore if he can get Vanguard Group under his belt either by buying them out or tying up with them. That will take them close to 20% shareholding. He should start exercising Creeping Tender offer Strategy and in the next few months try to bring his shareholding close to 35%. He should also try to offer directly to other shareholders in twitter. There are 11 Board of Directors in twitter. Elon Musk should target at least 5 to 6 directors in the Board of twitter to be on his side and try to replace the other directors with his shareholding. He should use proxy-vote strategy to replace these directors not towing his line. The Board is now toying with the idea of diluting the shareholding by offering additional shares to the existing shareholders – Poison Pill defense strategy. Elon Musk should counter this by aggregating more shares before this strategy is adopted. We are going to witness this interesting tussle between two superpowers in the corporate world.
