Why Twitter’s Poison Pill Probably Won’t Work

Twitter (TWTR) is one of the largest social media companies in the world, and is being targeted in a hostile acquisition by the richest man in the world, Elon Musk. 

According to Bloomberg, Twitter’s board has deployed a poison pill strategy to prevent Musk from taking over the firm; here’s why it won’t work.

What’s a Poison Pill?

A poison pill is a defensive mechanism that targeted entities use in the event of a suspected hostile takeover.

Although it’s not been confirmed, it’s thought that Twitter will allow its shareholders (apart from the acquirer) to buy additional shares of the company at a deeply discounted value, which in turn dilutes the intrinsic value of the company and causes the acquisition to be less feasible.

Twitter will likely use this strategy to “buy time.” This move suggests that the board is looking for an escape route, one of which could be to seek an alternative buyer that would sell the shares back to the board/management in the future.

Why Won’t this Work?

First of all, this isn’t an intercorporate transaction. Poison pills only really work when the acquirer has a fiduciary duty as an investment fund, or if it’s a publicly listed company.

Musk’s acquisition of Twitter isn’t just for economic reasons. Sure, he’ll probably de-list the company, add value, and re-list it for a profit (if he were to acquire the firm).

However, Musk has a longstanding record of seeking “life-changing solutions” and his monetary goals has never been his central quest, thus making a poison pill a misaligned strategy.

The second reason this tactic probably won’t work is because of Twitter’s shareholder sentiment. Twitter stock has made less than 5% in gains since listing as a public company in November 2013.

A near-decade of failing to successfully monetize its user base and slowness in new product offerings has caused many of the stock’s shareholders to grow impatient.

A Musk acquisition at $54.20 per share is higher than the stock’s market price, and could see much of Twitter’s investors benefit from an acquisition arbitrage. Thus, many of the firm’s shareholders will likely vote in favor of the acquisition rather than settling for management’s dilution of the stock’s fair value.

Implications for Twitter’s Stock

As mentioned, Twitter’s stock already possesses a poor risk-return profile, which is conveyed by its underwhelming Sharpe Ratio of 0.0857.

The stock’s risk-return utility will likely dampen even further from here as acquisition defense strategies and everything that comes with them tend to increase volatility, while negatively skewing returns. It’s unlikely that a stock that’s trading at 7.1 times its sales and 54.29 times its cash flow will handle this scenario particularly well.

On the other end of the spectrum, if Musk manages to acquire Twitter at his proposed $54.20 per share, the stock would likely surge. The “Merger & Acquisition arbitrage strategy” is one of the most widely utilized event-driven techniques among investors, and it’s likely to go into overdrive if a real Musk-Twitter deal occurs.

Wall Street’s Take

Turning to Wall Street, Twitter stock earns a Hold consensus rating based on five Buys, 20 Holds, and three Sells assigned in the past three months. The average Twitter price target of $45.57 implies 2% upside potential.

Bottom Line

Twitter’s utilizing every tool it can to block a Musk acquisition. However, the board’s strategy isn’t very well aligned with the scenario, and it could end up diluting Twitter’s shareholders, which could swing an acquisition vote in favor of Musk.

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