Elon Musk has never been short of shaking up the global tech scene. From the successful launch of SpaceX, the Boring Company’s Tunnels in Las Vegas, to the commercialisation of civilian-grade flamethrowers. Musk has, as a result, been adored by the media and general public either as a messiah to the dreary corporate image portrayed by other tech giants, or being called-out as a CEO who enjoys sensationalising his successes. In recent weeks, Elon has shown interest in acquiring the social media giant Twitter. We will give you the low-down on what has transpired so far in this article. Let’s dive right in.
April 4th, 2022
Elon Musk, Tesla’s CEO (NYSE:TSLA) announced that he had purchase a 9.1% stake in Twitter (NYSE:TWTR). The news sent Twitter’s stock price soaring to more than 27%. Musk currently owns 73,486,938 shares of the Twitter worth US$2.89 billion (based on the closing price on April Fool’s Day), making him the company’s largest individual shareholder.
April 5th, 2022
Twitter announced that Musk is to be appointed to its 11-person board, serving as a Class II director with a term that expires in 2024. The deal would prohibit him from owning more than 14.9% of Twitter’s stock or taking over the company, according to a filing with the Securities and Exchange Commission (SEC).
“Through conversations with Elon in recent weeks, it became clear to us that he would bring great value to our board,” Parag Agrawal, CEO, Twitter.
Musk later replied to Agrawal in a tweet that he plans on working with Twitter’s CEO and board "to make significant improvements to Twitter in the coming months! "
Musk polled his 80 million followers about whether they would like to be able to edit their Tweets after posting them. Agrawal subsequently quoted Musk’s tweet to say that “The consequences of this poll will be important. Please vote carefully.”
This so-called "edit button " has been one of the most commonly requested features of the social media platform. In an ideal world, it would simply allow users to clean up typos after publishing their tweets, but critics claim the feature could be used for abuse, allowing users to substantially change the meaning of tweets after they've been shared across the platform.
Musk’s investment could ruffle more features with the SEC. The SEC requires anyone with more than 5% stake in the company to disclose their purchase within 10 days. Musk first acquired the shares on March 14, 2022, and did not inform authorities till April 4, 20 22 — 21 days after the fact. The fines for such violations are typically not too exorbitant (particularly in the case for Musk) and would typically hover around the US$100,000 mark.
Another avenue where the SEC could have fined Musk was via his filing of Schedule 13G instead of filing the more complicated Schedule 13D, where both are commonly referred to as “beneficial ownership reports”. This could have resulted in a fine from the SEC, however this was avoided after an amended 13D filing was submitted by Musk on Tuesday evening.
April 9th, 2022
Twitter’s CEO announced in a message to the company that Elon musk is no longer going to join Twitter’s board.
Joining Twitter’s board would have prevented Musk from owning more than 14.9% of the company shareholding and having a seat at the board would also require the billionaire to take a more quiet stance rather than speak up openly about the management of the company, the latter of which seemed like a ‘big ask’ for someone like Musk.
Musk staying off the board of directors sets up “a ‘Game of Thrones’ battle between Musk and the management, with a high probability that Elon takes a more hostile stance towards the company and further building his active stake in the company,” said Wedbush Securities Managing Director of Equity Research, Dan Ives.
After returning to sit on Twitter’s board, Musk updated his filing with the SEC indicating that he would not play a passive role in the company’s affairs. The decision immediately raised questions about what the unpredictable billionaire would do next. This was, perhaps, first clue that he may attempt something more radical than just buying stocks and serving as a board member of the company. Pundits, at the time, have even speculated that Musk has his eyes set on bringing the company out from the stock market (i.e. going private).
April 14th, 2022
Elon musk offered to buy Twitter for US$43 billion at US$54.20 per share in cash as per the closing price of Twitter stock on April 1st (another 420 reference), which is a premium of about 20%. He also insisted that the social media company needs to be transformed as a private company. Twitter’s shares later shot up 18% on the news. Musk also implied that should the offer be rejected, he may dump some or all of his current positions in the company.
“I am offering to buy 100% of Twitter for US$ 54.20 per share in cash, a 54% premium over the day before I began investing in Twitter and 838% premium over the day before my investment was publicly announced,” Musk said in the filing. My offer is the best and final offer."
Twitter confirmed receipt of Musk’s offer, noting in a press release that it's "Board of Directors will carefully review the proposal to determine the course of action that it believes is in the best interest of the Company and all Twitter stockholders."
Musk says that Twitter must go private in order to undergo the changes that need to be made. These include an edit feature, an open-source algorithm, less moderation, and a higher bar for removing sending tweets.
Saudi Arabia Prince Alwaleed bin Talal tweeted from his verified account that Musk’s offer of a US$43 billion cash takeover of the company does not come close to the "intrinsic value " of Twitter. He also retweeted this post in 2015 stating their share ownership of Twitter to 5.2%, which amounted to 3.75 billion riyals (estimated US$20 billion).
Musk Responded to the tweet, asking how much of Twitter, directly and indirectly, was owned by Saudi Arabia.
April 15th, 2022
Behind the scenes, Twitter’s board members are plotting their response to the takeover scheme. The company voted unanimously to adopt a limited duration shareholder rights plan, often called a "poison-pill” to fend off potential hostile takeovers by diluting the state of the entity eyeing for the company’s shares.
Under the new structure, if any person or a group acquires beneficial ownership of at least 15% of Twitter’s outstanding common stock without the boards approval, other shareholders will be allowed to purchase additional shares at a discount.
The plan is set to expire on April 14, 2023.
What is a ‘poison pill’?
To put it simply, the move taken by Twitter is not formally referred to as a ‘poison-pill’, however, that is how the corporate world refers to it. What Twitter’s board unanimously agreed upon is actually called a limited duration shareholder rights plan.
Poison pills provide existing shareholders the option to buy more shares at a lower price, effectively deleting a new, hostile party’s ownership stake. The poison pill strategy was developed by New York-based law firm Wachtell, Lipton, Rosen, and Katz in the 1980s. The terms stems from the practice of spies carrying a poison pill that they could ingest if captured by the enemy, preventing them from extracting knowledge through torture or other means.
While the poison pill strategy is generally bad for all shareholders in the short term, it also makes it difficult for the hostile party — in this case, Musk — to buy all of the new shares.
April 15th, 2022 (Part II) — Aprile 17th, 2022
Musk’s plan to take the company private and to be its largest shareholder took a big hit when the American investment advisor, Vanguard Group, who owns 10.3% (US$3.78 billion), took matters in its own hands by exercising it’s right to refuse the takeover.
Musk remains to be Twitter’s largest individual shareholder, together with Jack Dorsey, the company’s former CEO. The latter has had strong opinions about the company’s board, citing in his tweet that “(the board has) consistently been the disfunction of the company,” and will remain as a board member till next month. He also later agreed with venture capitalist, Garry Tan, that a badly run board “can literally make $1 billion in value disappear".
Drawing the observations from the powers at play, Twitter will present an interesting case on corporate governance, how boards could (or should) unlock value through corporate actions, and whether does rationality prevail in the capital markets. Musk has proven that the conventional approach towards building and running a technology company remain to be archaic, where detractors tend to take a more cynical view of his methods. As investors, we should be mindful of hostile takeovers, and extensive research to be conducted on the company together with the leadership can indeed generate value over in the long run.
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