Tuesday, Aug 09, 2022

The Elon Musk Takeover: Lessons For Hostile Acquisitions And What It Means For Twitter

The world’s richest man Elon Musk has acquired the microblogging site with hostility and now wants to make changes to its governance and the world of start-ups and fund managers watches with bated breath

Elon Musk
Elon Musk AP

Being in the news is nothing new for US business magnate Elon Musk. But his take over of microblogging site Twitter after buying a 9.2% stake in the company, which made him the largest shareholder, outdo his earlier stints of grabbing the headlines.

As the game of footsie between Musk and the social media platform played out for days, the billionaire continued to take major steps towards buying the company. But the question is, what does Musk’s takeover mean for the social media platform? How can a company safeguard itself from such “hostile” takeovers? 

Twitter safeguarded itself by taking the “poison pill” defence on April 16 to ward off Musk’s attempt at a hostile takeover. The step gave existing shareholders the right to purchase additional shares at a discount, effectively diluting the ownership interest of the new, hostile party. But it did not throw Musk out of the game as the Twitter board offered existing shareholders one-thousandth of a share of preferred stock for each common share they own at a price of $210. This number is interesting because 210 is the half of 420, a term associated with cannabis culture, which indicates that the Twitter board was also acutely aware of the game that it had to play in order to “save the company”, but in the end could not.

Love me tender 

However, shortly after the Twitter board rejected Musk’s offer, he responded with what most people know as one of Elvis Presley’s most famous songs -- Love Me Tender. “Tender is also a reference to ‘tender offer’ whereby Musk could completely bypass the Twitter board and take his offer directly to Twitter shareholders,” said Kunal Chowdhry, CEO, Apollo Singapore Investments, a Singapore-based venture capitalist firm. As the Musk-Twitter drama played out it laid bare before us one of the shrewdest takeover moves, where the protagonists kept all options open.

There were several scenarios under which Musk could take over Twitter, albeit not through the hostile route. But the conundrum before the Twitter board was Musk’s offer. Given the premium he offered and the fiduciary responsibility of the board to look at shareholders’ interest and not pursue their own agendas.

Before the final takeover, remember Musk had kept all his options open. Musk also said that if the board does not accept his offer, he will reconsider his position as a shareholder in Twitter. “Therefore, what may also weigh in is that if Twitter was to reject Musk's offer, he may dump his shares in Twitter, which could adversely affect Twitter's stock price.  

Musk over days also resolved a key hurdle of unavailability of funds as he arranged the financing, including $21 billion of his own money and $12.5 billion via a margin loan secured against his shares in Tesla.

Warding off hostility 

As business pages have churned out back-and-forth lobs and volleys between the two over the last three weeks, it brings the focus back on whether companies can safeguard themselves from such sudden takeover bids. Obviously, one way to do it is by strengthening itself and making it less appealing to takeover bids through  asset and ownership restructuring, anti-takeover constitutional amendments and the implementation of poison pill rights plans (similar to the one now adopted by Twitter). “In poison pill rights plans, the existing shareholders of the company are offered shares at deep discounts. The more the existing shareholders buy additional shares, the more diluted the hostile acquirer's interest becomes. This increases the cost of the bid for the hostile acquirer. This method was used by Netflix after an investor acquired 10% stake in the company,” says Chowdhry. 

There are also other anti-hostile takeover strategies, including buy-back/stock re-purchase, sale of whole or most important assets, which makes the hostile bid less attractive, white knight strategy, in which the target company seeks out other friendly investors, greenmail strategy, in which the target buys its own shares from the hostile acquirer at a premium, pac-man strategy, where the company buys stocks in the hostile acquirer, and ultimately gaining control of the acquirer and shark repellents/porcupine provisions, in which staggered or classified board structures are implemented through which only specified directors are re-elected to the board while others have a fixed tenure forcing a hostile bidder to wait until the completion of the tenure. 

Some like Ankita Vashistha, CEO and managing partner of Saha Fund, a venture capital fund only for women entrepreneurs, suggests that it is not that easy for companies to prevent takeover bids. “It is difficult to prevent takeovers when the premium is high and the shareholders’ trust in the acquirer is high and is low for the management and the board of the company. Companies need to be much more closely aligned to their users and shareholders. Musk has shown to be close to his shareholders when he sold his shares to pay taxes and also tweeted about his Twitter moves,” she says. 

Twitter, post Musk 

Did Musk really buy Twitter in an attempt to, as he says, make it “less woke” and give parties on all sides of the spectrum the opportunity of “free speech”? Or, is this simply a tactic to force the changes he wants at Twitter in exchange for pulling his offer?  It is hard to answer these questions. But as he takes over Twitter it is certain that the platform will undergo a sea of changes. 

While Musk has been a proven entrepreneur by leading tech businesses with Tesla and SpaceX, there is more than just tech that seems to be driving his choice for the takeover of Twitter. Musk has long presented himself as a proponent of free speech and views himself as a libertarian. He recently tweeted that a completely unbiased social media platform is one in which the most extreme 10% on the left and right are equally unhappy. He has also suggested that he will ensure that Twitter incorporates an edit button, allowing users to edit their tweets and, more importantly, will also wage war on spam bots, so-called automated Twitter accounts controlled by bot software and programmed to replicate tasks of authentic Twitter users. 

Experts suggest that Musk's immediate plan seems to be to convert Twitter into a closely held private company. Twitter has been a listed company since November 2013. Converting it into a private company will ease compliance burden and give its management elbow room to pursue riskier and longer-term projects without being concerned about public shareholders demanding quick results. For instance, Musk is not quite happy about Twitter's reliance on advertisement revenues. “Being a closely held private company will give Twitter sufficient opportunity to pursue Musk's ideas irrespective of whether they make for immediate profits,” says Srivastava. 

The inherent biases of the owners of a platform seeping into its functionality is all the more reason for decentralisation of the platform. But, can Twitter, owned wholly by Musk, be fully decentralised and unbiased? Musk does have controversial views, such as when he suggested, at the beginning of the Covid-19 pandemic, that “the coronavirus pandemic is dumb” and expressed scepticism around Covid-19 vaccines before apparently changing his mind. Would a Musk-owned Twitter allow users to freely express views that are in direct conflict with Elon’s own? We will have to see.