Elon Musk borrows from Carl Icahn’s playbook as his Twitter bid gains steam

April 25, 2022, 1:46 PM UTC

At first glance, it’s hard to think of two business titans as different in so many ways as Carl Icahn and Elon Musk. Icahn ranks as the world’s premier raider of poorly run and undervalued businesses; Musk reigns as the top builder of new-age enterprises on the planet. Icahn has made a big slug of his billions in old energy; Musk is the leading prophet of renewables. Icahn skewers his targets via open letters to shareholders in a proselytizing literary voice that veers into satire, “taking umbrage” at boards that act like “barons in the castle” and treat shareholders “like serfs.” Musk is a creature of social media who has marshaled his celebrity to rally believers to Bitcoin and the joke-inspired Dogecoin––vehicles, by the way, that Icahn says “I wouldn’t touch” and are floating in “a ridiculous bubble.” (Recently Icahn shared his hostile-takeover playbook with this writer; you can read the inside story of his quest to take over Southwest Energy here.)

But the 86-year old crusader and the 50-year old entrepreneur share two overriding similarities. First, they’re born mavericks who prize shouldering what look like crazy, near-impossible challenges––for each, achieving the sublime often means risking the seemingly ridiculous. Second, they’re both incredibly rich enough to pursue those projects on their own, as independent contractors, without the outside backing almost any other adventurer would need. And now, Musk has joined Icahn in the pursuit that has become so difficult it’s exceedingly rare: leading hostile takeovers. “To do a hostile today, you need to be a unilateral actor, and until Musk arrived, just about the last of the breed was Carl Icahn,” says James Woolery, founding partner in law firm Woolery & Co. and former head of North American M&A for JPMorgan Chase. “It’s extremely difficult for a public company. Now Musk’s launched a bid that few other than Icahn would have made. His chances of winning may be even better than Icahn’s usually are, because Musk can get support on social media that will rally shareholders, and democratize the process, in a completely new dimension.”

Musk indeed appears to be on the verge of an Icahn-like victory––for the reasons Woolery cited. He’s offering a big price, he’s got the personal cash to get it done, and he’s not going away. Press reports on April 24 stated that the Twitter board is close to accepting his deal.

Why it’s become so difficult to do hostiles

In his career as an attorney and investment banker, Woolery has worked on many deals involving unsolicited bids, both defending the target and counseling the attacker. He’s often crossed swords with Icahn, successfully defending Clorox from the legend’s onslaught in 2011, and representing Icahn’s partner Darwin Deason in an unwelcome bid by Xerox for HP, a gambit that foundered when the pandemic struck. Woolery represented Dell in its successful campaign to go private, a move opposed by Icahn, and in 2012 represented Medco Health in its friendly merger with Express Scripts. Hence Woolery is in an ideal spot to explain why hostile takeovers have become so incredibly challenging and so unusual, but the rare powerhouse boasting the money and grit to make a premium bid and see it through is almost always assured of winning.

He cites the example of staggered boards. “Today, it’s standard practice for the target’s board to activate a poison pill,” says Woolery. “The only way to cancel the pill is to lead a proxy battle by proposing your own slate of directors, and winning the majority of the seats. But in many cases, only one-third of the directors are elected at each annual meeting, so it can take two years to win the majority and terminate the pill.” The intricate politics of clinching a win is also a major barrier. “The decrease in activity in the space makes anyone who makes a hostile bid stand out, look quixotic,” he says. “The process involves so many legitimate conflicts. The banks have so many conflicts in picking sides. If they’re leading or financing a raid, and one of the directors at the target company is a CEO of a big customer, that may present issues.” In some cases, he adds, the index funds that often own 25% more of the shares are more inclined to back management than the likes of individuals and hedge funds, so another tough, unpredictable task is persuading advisors such as ISS that strongly influence the passive vote.

Woolery notes that in the 1980s, it was common for big public players to make unfriendly offers for coveted prey. Indeed, from 1984 to 1986, corporate America witnessed no fewer than 62 hostile bids, including KKR for Safeway, Unilever for Chesebrough-Ponds, Mesa Partners for UnoCal, and Occidental Petroleum for MidCon. In those cases, the acquirer won. By hostile takeovers, we’re talking about actual tender offers to take control or purchase all of target, not proxy battles to win a couple of board seats––though as we’ll see, a full victory can also require a proxy war, or at least the threat of one. Today, they’re highly unusual, excluding Icahn’s forays, such as his recent, ongoing war on Southwest Gas. “But in the 1980s, legislation in states such as Delaware made hostiles much more difficult,” observes Woolery. “Poison pills were approved. You saw far more staggered boards that increased the length of time it took to get to a shareholder vote. Today, the minimum is a year, and it can often go to two years.”

Still, Woolery insists that the few acquirers who can navigate the costly, time-consuming process are likely to win. “The buyer is usually offering a big premium for the stock,” says Woolery. “The problem is getting the vote to the shareholders, all the current rules delay that process. But if a buyer can get the whole way, the shareholders will almost always vote out the board, get rid of the pill, and take the offer. Or, they’ll tell the directors ‘if you don’t do it, if you don’t negotiate premium deal over no deal, we’re going to vote you out.’ That the board accept the offer before the vote, or get a better one.” One key, he says, is to pick a group of prestigious directors as candidates who feature lots of experience in the industry. “That slate will usually be much better qualified than the directors in place, and help you win. But putting the slate together still another hurdle,” says Woolery.

Why Woolery thinks Musk’s a likely winner

Musk is bidding $54.20 per share for Twitter, a 33% premium over its close before news that he’d bought a big stake broke on April 1. True to form, Twitter installed a poison pill that limits his holdings to 15% while it considers his offer. Musk’s secured the entire $46.5 billion in financing required to make a tender offer to all shareholders, a package that consists of $21 billion his own equity, and a combination of credit from a consortium led by Morgan Stanley, and a margin loan on his Tesla shares. He hasn’t announced a proxy fight to eliminate the pill. In fact, only three of Twitter’s ten directors will be elected at the May 25 annual meeting. That’s a good guide to why these deals are such a slog. If Musk needed to win a majority of seats, it would take him until at least May of 2023.

But Woolery believes Musk has power to sway shareholders that goes beyond even Icahn’s. “He can go to town by talking on social media about how bad the board is, for example,” says Woolery. Musk has already slammed the directors for owning little stock and lacking much “economic interest” in Twitter. “He could put together a slate of directors a lot more qualified than the current board,” says Woolery. “With a board’s like Twitter’s, it’s all about prestige and reputation. He can get the social media crowd to write all kinds of stuff about the directors. All of a sudden, their roles won’t be nearly as ‘reputational.’ When his crowd goes after the directors on social media, that puts them under the hot lights, and they’re likely to come to the table faster.” Woolery adds that Musk is starting a Gamestop-like platform on social media to create a shareholder referendum on the current Twitter board and its decisions, right now.

Hence, despite Twitter’s poison pill and a staggered board, Musk always had the whip hand. Twitter will go with Musk because of the rich price he’s willing to pay, and that no one else will come near paying. Not many beyond the richest person in the world, and the veteran who’s been warring for seven decades can achieve what’s become an epic task. For Musk, the avowed goal is making Twitter an open forum for free expression. His skill at exploiting that new marketplace, says Woolery, could be a crucial weapon that even the the old master can’t summon.

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