What Is a Poison Pill And Does It Work?

Before Elon Musk’s headline-grabbing offer to buy Twitter for $43 billion, the term “poison pill” would conjure images from spy thrillers for some, but now the world is learning that it has a whole new meaning.

What is a poison pill?

A poison pill in the business world, also called a shareholder’s rights plan, is a defensive tactic that a company’s board of directors can use to deter or thwart a potential takeover bid.

The maneuver relies on a company diluting the supply of its shares by giving existing shareholders (other than the party attempting a takeover) the right to buy deeply discounted stock. By diluting its shares, a company forces the party attempting a takeover to spend more than they intended to follow through with their acquisition or sit down and negotiate.

In Twitter’s case, the board has announced that its poison pill provision will come into effect if any single shareholder acquires more than 15% of the social media site’s stock. Musk currently owns around 9% of the company’s stock.

Could Twitter’s poison pill plan work?

Elon Musk has previously stated he doesn’t care about the economics of buying Twitter, meaning his bid to buy the company might not be deterred by inflated numbers or a poison pill. Musk’s cause is also buoyed by his status as the world’s richest man, with a net worth around $260 billion.

Musk has also already secured the funding he needs to follow through with his initial offer. Earlier this week Musk revealed he has over $46.5 billion at his disposal, including approximately $33 billion of his own cash, $21 billion of equity and $12.5 billion of margin loans against a portion of his Tesla stock.

So Musk has the will and the means to follow through on the offer, but in the end only he knows what he will do. To figure out Musk’s odds of success, we took a look at some previous poison pills to gauge the tactic’s success.

Poison pills of the past

The poison pill has been deployed by companies of all sizes and industries since it emerged in the 1980s to ward off corporate raiders and other groups looking to make hostile takeovers. In fact, since 2017, at least 492 companies have swallowed the poison pill, according to Insightia data cited by The Wall Street Journal, and of those companies,14% ended up being acquired.

Most recently, the tactic was used by department store chain Kohl’s in February 2022 to try to thwart a takeover by activist investor Macellum, after the retailer rejected a buyout offer from hedge fund Starboard Value. The battle is still ongoing.

Barnes & Noble adopted the pill in 2018 to get rid of an unidentified and unsolicited acquirer; while the tactic worked, the company still sold itself to Elliott Management a year later. Netflix made headlines in 2012 when it successfully used the deterrent to fend off activist investor Carl Ichan from acquiring more than 10% of the company.

However, the poison pill doesn’t always go according to plan. For instance, Microsoft made an unsolicited offer to buy Yahoo in 2008 for $44.6 billion. The bustling internet company’s CEO, Jerry Yang, used the poison pill to play hardball when negotiating with Microsoft. The tech titan eventually dropped its acquisition plans after bumping its offer to $47 billion. Subsequent pushback from analysts and investors and criticism that Yang hadn’t negotiated in good faith cost him his job. Verizon eventually acquired Yahoo in 2017 for approximately $4.83 billion.

While data shows us that a poison pill is largely effective at warding off traditional hostile takeover attempts, Musk is anything but traditional — and Twitter’s fate remains up in the air.

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