Twitter adopts Poison Pill Strategy
To sustain your company in the corporate world for the long term you need to have the tactics and strategies on hand. Twitter is facing similar challenges, and in order to combat them, it has adopted a strategy called Poison Pill Strategy.
Before we get into that, let’s first see why this strategy was developed in the first place. There are generally two ways to eliminate the competition in the market, either you have a competitive advantage over your competitors or you buy out the competition altogether. Talking about big giants in an industry, they buyout the smaller competitors to maintain their market share, buyout can be against the management of the target company and this is called a hostile takeover. So, how to defend or rather avoid the hostile takeover.
That’s where the ‘poison pill strategy’ comes into the picture.
What exactly is the poison pill strategy then?
Let’s say a giant company called A ltd. in the industry has around 5% (total outstanding shares in the market are 100 shares) i.e., company A owns 5 shares in the company B ltd. which is a small company in the same industry. Company B has a competitive advantage in the industry and industry experts believe it will outgrow its competitors 2-3 years down the line. Company A wants to increase its stake by acquiring company B, but the management of company B is not willing to liquidate its stake. Now, company A goes into the open market to buy the stake from retail and other institutional investors. Company B decides if company A acquires a 10% stake, it will start to issue new shares (for e.g., 25 new shares) at a discount. Then the stake of company A will come down to 8% (10 shares/125 total outstanding). You might wonder, won’t company A have the right to buy these shares at a discount? No, the new shares will specifically restrict company A to buying these shares at a discount and if they want to buy these new shares then they have to buy at a premium from other existing investors and it can be a costly bet.
Twitter isn’t the first company to adopt this strategy. In 2013, Gain Capital adopted this strategy to defend the hostile takeover by FXCM.
What’s next on the table for Twitter, no one knows except Elon Musk. Let’s wait for things to unfold further.
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