News of Elon Musk buying Twitter to make it private has fuelled up many debates on the issue of capitalism and the power of money in today’s economy. While some laud the richest man on the planet, others complain about one man possessing too much power in his hands. To avoid such a situation, talks of shark repellent strategies by Twitter were catching fire before the imminent deal was revealed.
The strategies formulated to keep the predatory investors (sharks) at bay are shark repellent strategies. Shark repellent measures come into effect to lock out potential hostile takeovers. These strategies may be periodic or continuous efforts exerted by management on the advice of investment bankers to make particular amendments to its bylaws.
Some of the shark repellent strategies that Twitter could have used are as follows:
White Knight- To avoid hostile takeovers, investment bankers might advise management to sell off the company’s assets to a friendly third party company. This sell-off may include a buy-back clause at a reasonable price on future dates. However, if the management of the third party company changes, it may refuse to sell back at the agreed-upon price. This strategy makes the company unattractive to the hostile takeovers. The favourable third party, which may prove to be the saviour of the target company, is considered the ‘white knight’.
Staggered Board- This strategy involves electing directors of the company at different points in time. For instance, some directors may be selected for a period of one year, and others for a period of three years. This strategy makes it difficult for the potential acquirer to influence the majority of directors due to the ever-changing board members.
Golden Parachute- Under this defence mechanism, certain provisions are included in the executive’s or senior members’ contract that in the event of an acquisition, the acquirer is liable to pay them a hefty compensation in the form of cash or securities if the takeover attempt succeeds. This provision may be inserted deliberately in the contract to make it unattractive for an acquirer to force a hostile takeover. The acquirer will also acquire a massive debt in terms of money or securities to be catered to the executives or senior management.
Supermajority- It is a defence mechanism usually included in a company’s bylaws and becomes activated when an acquirer takes the initiative for the company’s takeover. This tactic involves requiring a majority of more than 70% of shareholders to be willing to approve the takeover. It discourages the takeover as the acquirer would be either supposed to buy the majority of stocks, thereby increasing overall cost by a considerable margin or spending time and effort convincing the majority of stakeholders.
Poison Pills- One of the most popular shark repellent strategies that Twitter was in the talks of employing to avoid Elon Musk was poison pills. A shareholder rights plan is a tactic the organisation’s board employs against a takeover. It involves issuing vast amounts of shares at a discounted price to existing shareholders to dilute the ownership attempt of a new, hostile party. It makes the overall takeover more expensive and undesirable.
People Pills- This strategy guard against the takeover by highlighting that the entirety of the board and management of the corporation will resign in the event of a hostile takeover. This measurement threatens the interested acquirer by fearing losing an experienced management team.
Macaroni Defense- This defence mechanism involves issuing a large number of bonds redeemable at a higher price in the event of a takeover. This discourages the potential acquirer from proceeding with the seizure as the liabilities might be too much to cope with.
Scorched Earth- This tactic is derived from military strategies and involves destroying everything that might aid in the corporation’s takeover. Extreme poison pills may be used while employing this tactic. It can be referred to as a last resort to prevent a hostile takeover.