How Twitter used a real estate investment plan to take on Elon Musk

Earlier this month, as Elon Musk's bid to acquire control of Twitter intensified, the company's board of directors embraced a dramatic and peculiar strategy: the poison pill.

The initiative happened after Tesla CEO Elon Musk purchased more than 9% of the social network but before he pieced together the $44 billion that ultimately won him the company this week. And during the brief period between the old and new Twitter regimes, the poison pill was a high-stakes gamble to keep the firm out of Musk's hands.

The poison pill tactic ultimately failed due to the strength of Musk's bid, but what few noticed as the tale unfolded was that Twitter was emulating the real estate investing sector.

A poison pill is a technique used to deter investors from seizing control of a business by purchasing large quantities of stock without the board's approval. In other words, it serves as a deterrent to hostile takeover attempts.

The poison pill approach enables investors to purchase newly issued business stock at a discount. This dilutes the would-be owner's shares, as they are typically prohibited from purchasing shares during the poison pill event, resulting in them owning less of the company than they anticipated. Thus, a poison pill technique increases minority shareholder control while removing some influence from the would-be buyer – in this example, Musk.

There are, however, drawbacks. Additionally, deploying a poison pill might devalue the company's stock, so earning the term "poison pill," and discourage institutional investment, among other things. Another possible disadvantage is that incumbent managers and leadership are empowered — even if those managers aren't leading the organization to top performance.

A well-known and recent example of this is when Papa Johns employed a poison pill to prevent founder John Schnatter from regaining control of the pizza firm following his ouster. Other businesses, including Groupon and Dave and Buster's, have used poison pills in the recent past.

In the case of Twitter, the business said in a filing with the US Securities and Exchange Commission that the poison pill would "protect owners from coercive or otherwise improper takeover activities." The plan, which was unanimously agreed by the board, would have kicked in if any shareholder bought 15% of the company.

How does any of this relate to real estate?

Poison pills have been utilized by businesses across a variety of industries in the past, but by the late 1990s, the technique had become synonymous with one particular industry: real estate.

In 1998, the Wall Street Journal reported that 31 separate real estate investment trusts, or REITs, employed poison pills. These trusts often control huge property portfolios — such as shopping malls, office buildings, or self-storage — and offer shares to investors, allowing individuals to become technically partial landlords just by purchasing stock.

However, numerous REITs' stock prices plummeted in the 1990s. According to the Journal, prices fell to the point where corporations were worth less than the overall value of their properties — meaning investors could have purchased all of the shares in some REITs for less than the land those REITs owned.

The 31 REITs that employed poison pills in the late 1990s constituted a significant increase — there were just five the year before — and one analyst told the Journal at the time that even more real estate corporations were considering the tactic.

The extensive use of REIT poison pills subsided in the early 2000s as the economy matured. However, as recently as 2020, corporate defense firm Latham and Watkins advised real estate firms to adopt defensive methods such as poison pills in reaction to the rising coronavirus epidemic. That is to say, poison pills remain a staple of publicly traded real estate corporations' toolkits.