Faced with Musk's $40 billion all-cash acquisition, Twitter lacks the same key defensive weapon

"I've already made an offer." Musk, the world's richest man, announced his takeover offer for Twitter on his personal Twitter account.

On April 14, documents disclosed by the Securities and Exchange Commission (SEC) showed that Elon Musk, the world's richest man, had sent a non-binding offer to Twitter on April 13 to acquire all of Twitter's remaining issued common shares in addition to his own in full cash for $54.20 per share.

The purchase price was 54 percent higher than Twitter's closing price on Jan. 28, just the day before Musk began buying Twitter's stock. The purchase price was also 38 percent higher than Twitter's closing price on April 1, when Musk publicly announced his investment in Twitter. As of Feb. 10 of this year, Twitter's total number of issued common stock is about 800 million shares, and if you want to eat about 90% of them, Musk will have to pay about $40 billion in cash.

"I invested in Twitter because I believe it has the potential to become a free speech platform on a global scale, and I believe that free speech is a social responsibility for a functioning democracy," Musk said in a filing to the SEC. "However, since investing (twitter), I've realized that if it were in its current form, the company would neither be able to thrive nor meet the needs of society." Twitter needs to transform into a private company. ”

My offer is my best and final offer and if it is not accepted I will need to reconsider my position as a shareholder... Twitter has extraordinary potential and I will unlock it.

—Musk

In fact, when Musk decided not to join Twitter's board a few days ago, speculation about his intention to "hostilely acquire" Twitter has already emerged. Because as part of the agreement to join the board, Musk must agree not to acquire more than 14.9% of Twitter's shares during his tenure on the board.

Over the past week or so, Musk, unhappy with Twitter's operations, has raised a series of questions about the current state and future of the social platform, and expressed his concerns and suggestions.

One of his concerns focused on Twitter's control of content, arguing that if Twitter didn't abide by the principles of free speech, it would fundamentally undermine democracy.

Musk also suggested that Twitter should add an edit button that allows users to rewrite the content after posting. In another set of tweets, Musk criticized Twitter Blue, Twitter's subscription-paying service, noting that it shouldn't have ads.

Musk's thoughts on Twitter include whether it should convert its San Francisco headquarters into a homeless shelter and whether the "w" in its English name should be removed.

Twitter has yet to respond to the takeover offer. Daniel Ives, an analyst at investment bank Walbush Securities, told CNBC that he thought Twitter could barely turn down such an offer, while Adam Crisafulli, founder of market commentary agency Vital Knowledge, said in the report that the offer was too low, after all, Twitter's stock price had reached $70 a year ago.

SEC documents show that even if both parties agreed to the takeover offer, it would be subject to a number of conditions, such as obtaining any necessary government approvals and requiring confirmable legal, business, regulatory, accounting and tax due diligence.

Leaving aside Twitter's willingness to accept the acquisition, if it does not, it may lack a powerful tool to resist at the moment, namely the dual-equity structure.

Such equity structures are not uncommon, such as Meta, Google parent company Alphabet, Snap, Berkshire Hathaway and other companies have adopted dual-equity structures, which not only allows corporate control to be firmly in the hands of insiders, but also can resist corporate sniper acquisitions.

Meta is probably one of the most extreme examples of dual-share structures. It has Class A shares, which people can buy, and each Class A share represents 1 vote; it also has Class B shares, which the average person cannot buy, and each Class B share represents 10 votes. Through individual shareholdings and agreements with other Class B shareholders, Mark Zuckerberg controls more than 90 percent of Meta's Class B shares. He may only hold about 14.5 percent of his Class A common stock, but he can call the shots without considering others, thanks to Class B shares.

But Twitter doesn't have that type of protection. Before going public in 2013, Twitter did not have a dual shareholding structure, which is likely to be the legacy of its turbulent experience. By the time it made its way to Wall Street in 2013, the company had replaced two CEOs, founders Jack Dorsey and Ev Williams, and handed the baton to an outsider, Dick Costolo, who jumped from Google years earlier.

As CEO, Costello held about 1.6 percent of Twitter before it went public, but that's down from Dorsey's 4.9 percent and Williams' 12 percent. So neither he nor Twitter's founding investors, such as Benchmark, a 6.7 percent venture capital firm, are in a hurry to build a system that would hand over enormous power to two people who first gained and then gave up the opportunity to run the company.

In addition, Dorsey re-emerged as CEO of Twitter in 2015 and remained there until November 2021, but it is not clear whether he wants a dual-share structure. When he stepped down as CEO again, Parag Agrawal, Twitter's chief technology officer, became his successor.

Dual-ownership structures are becoming increasingly a popular phenomenon. Data released a year ago by Columbia Law School showed that nearly 30 percent of all IPOs in the 2010s adopted this structure, up from about 7 percent in the 1990s. Its research shows that founders who own these shares typically retain about 30 percent more voting rights than ordinary shareholders, and that's likely enough to stop companies from making any progress, as overcoming the hurdle is costly.

Recently, some of the larger money managers have begun lobbying against dual-ownership structures, saying they are undemocratic and could stifle lucrative innovation. In 2017, the S&P 500 said it would not allow more dual-equity firms to join.

If you don't want to be acquired, what about Twitter? For now, it does establish a defensive mechanism in the process of electing directors: a staggered board mechanism at three-year intervals, which ensures that it is not single-handedly ended and makes the board confrontational. In addition, Twitter may also take a poison pill defense. Listed companies have been doing this since the 1980s. Twitter could sell the company's stock at a discount, which would reduce Musk's stake in the company but also depress its stock price. ■

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