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Elon Musk Has Been Poisoned
Here's how a "poison pill" works in the stock market.
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The past week or so has been very interesting with Elon Musk offering 16% of his net worth ($43B) to buy Twitter…16% of my net worth won’t even buy me a used Honda.
Built different I guess.
For better or worse, now he is being “poisoned pilled” by Twitter.
What does that mean? I had no clue either so I spent some time learning about it myself and will explain it to you at a 5th grade level later in this email.
Personally, I did not make any moves in the market this week. I’ll be making my typical monthly addition of $500 for April here soon and will update you on exactly what I buy.
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“Some people don't like change, but you need to embrace change if the alternative is disaster.” - Elon Musk
Let’s start by giving the Investopedia definition and then we will dive into a little bit more of what this means.
Poison Pill - The term poison pill refers to a defense strategy used by a target firm to prevent or discourage a potential hostile takeover by an acquiring company. (source)
Basically as we know, a couple weeks back Elon purchased 9.2% of Twitter to make himself the single largest stakeholder in the company.
That quickly escalated to him making an offer to buy the entire company last week ($43B).
I made an offer
sec.gov/Archives/edgar…— Elon Musk (@elonmusk)
11:23 AM • Apr 14, 2022
In response to this Twitter has implemented what is called the Poison Pill tactic to prevent Musk from buying the company and allowing more time for negotiation.
Here’s an example of how this works:
Note, these are made up numbers.
When an offer is made for a person to acquire more than 15% of a company, the board can approve a shareholder rights plan, aka the poison pill.
What this does is let non-takeover shareholders buy more shares at a discounted rate. For our example, Twitter’s poison pill let’s their shareholders buy additional stock at 50% of the current value.
Here’s why this is often a lose lose situation with some even numbers to make it easier.
Let’s say there are 1,000,000 Twitter shares on the market with the stock price at $10. That makes the market cap of the company $10M (1,000,000 shares x $10).
To trigger the poison pill, Elon would need 15% of the shares (150,000) with the other 85% (850,000) shares being owned by other investors. With the shareholder rights plan activated, the non-takeover investors can buy another share at 50% of the current price.
This increases the total outstanding shares to 1,850,000. Math below.
Elon’s Shares: 150,000
Non-takeover shares: 850,000
New shares for non-takeover investors: 850,000
Total shares: 1,850,000
Now there are 85% more shares and Elon’s share in the company has been diluted from 15% to 8.1%. Not good for Papa Elon. In addition, the stock price would also drop to approximately $5.40.
The non-takeover investor gets hurt too. Let’s say you had 1 share at $10. You get to buy another at 50% of the new price $5.40. That’s $2.70. Your basis for 2 shares is now $12.70/2 = $6.35. This isn’t a good deal because you lost around 15% since your cost basis is still higher than the current price.
Alright, deep breath.
Now while the numbers are cool, when you look into the roots of this ordeal it’s extra juicy.
Musk’s fascination with buying Twitter has stemmed from his so called interest in free speech. Twitter has been a huge source of controversy when it comes to free speech. For example, when President of The United States Donald Trump had his account completely removed from the platform.
Interesting enough, the Saudi royal family is a majority holder of Twitter and has publicly expressed that they do not approve Elon’s offer.
Why is an ultra wealthy family of foreign country so interested in the “free speech” of America? I’ll leave that up to you to decide.
Conclusion
Elon never fails to capture public attention.
Whether this is actually about free speech, or a media grab for something else he has coming we really don’t know.
Hopefully you at least learned a little bit about a poison pill.
Till next time, Cade.
Elon Musk is buying twitter just so he can suspend anyone who posts this picture
— Simple Jack Capital👨🦯📉 (@SimpleJackCap)
10:25 PM • Apr 15, 2022
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Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email send me a DM on twitter. See you soon!