Elon Musk’s purchase of Twitter is expected to go down in history as one of the largest hostile takeovers of all time.
Musk’s vision for Twitter — which he revealed even before he was briefly the largest investor in the company — reflects a new trend threatening corporate boardrooms: a growing tendency by shareholders to demand reform from companies, not just better financial performance.
Through pure might or grass-roots campaigns, sometimes in coordination with nonprofit groups, activists increasingly are trying to persuade corporate boards to reduce their impact on the environment, support the welfare of their communities and take other steps that can make good business sense by burnishing corporate reputations and limiting regulation.
I hope that even my worst critics remain on Twitter, because that is what free speech means
— Elon Musk (@elonmusk) April 25, 2022
Activists recently pressured Amazon and Apple to submit to audits of their racial equity policies, for example, while fossil fuel giants have been forced to begin reckoning with their carbon footprint. Growing dissent among shareholders at drug distributor McKesson led the company to dock the pay of an executive who presided during the opioid epidemic.
Even Carl Icahn, the legendary corporate raider known for hostile takeovers of Trans World Airlines and Blockbuster, has recently adopted the tactic — buying up shares and waging battles against McDonald’s and grocery chain Kroger, both of which he says support the inhumane treatment of pigs in their supply chains.
Icahn said in an interview he thinks “it’s great” that Musk succeeded in his bid for Twitter, because it shows the board of directors accepted the views of the company’s shareholders. He said he hopes to see more activist investors succeed in pushing boards and managers on matters beyond quarterly profits.
“There really might be a move in that direction,” Icahn said. “If you don’t have good leadership at the top, sooner or later you are going to pay a price for it.”
Brenden Lee, a spokesman for Twitter, declined to comment. Musk did not respond to a request for comment.
This activist approach contrasts with the playbook of typical corporate raiders, who for decades have succeeded in buying out struggling companies by presenting public plans for making radical cost cuts, shedding business lines or bringing in a new team of financially savvy managers.
That strategy is still common. Kohl’s is fending off multiple activist firms that argue the discount retailer has mismanaged its business and should put itself up or sale, and exercise equipment maker Peloton earlier this year forced out its CEO and cut thousands of employees after one investor, Blackwells Capital, argued to other shareholders and the board that the company’s strategy was floundering.
“The activist is part of the environment in which every business has to work,” said Brian Quinn, an associate professor at Boston College Law School. “They have to understand that the vast majority of their shareholders are passive but stockholders with the ability to target them can force changes.”
Musk in many ways is still following the old-school playbook, rejecting a board seat before launching a hostile takeover bid two weeks ago to build on his stake in the company. As the world’s richest person, Musk had the resources to snap up one of the most influential social media sites almost overnight. And despite his frequent tweeting on the matter, he has not detailed any plans to curb what he views as censorship on Twitter.
Based on some of his some public statements, civil liberties experts raised concerns that his ownership could actually harm the ability of some users to freely share their ideas.
One factor enabling the rise of corporate activism is growing support from large index funds which, through the money they manage for thousands of individual investors, are usually the largest shareholders in U.S. companies. Increasingly, these investors have sought to wield that influence to nudge corporate boards to change, said Marc Goldstein, head of U.S. research at corporate governance advisory firm ISS.
Activists can only be successful at big companies “if they can convince mainstream institutional investors to support them,” Goldstein said. “Those mainstream institutions are paying increasing attention to issues like climate and human capital management.”
Last year, a tiny activist firm called Engine No. 1 seized three seats on the board of Exxon partly by convincing major shareholders — including Vanguard, BlackRock and State Street — that the fossil fuel giant had failed to prepare for the climate crisis and its likely impact on the energy business.
Icahn has only bought a small number of shares in both McDonald’s and Kroger, where he has also criticized the stark gap between the pay of executives and rank-and-file employees.
That’s a major contrast to his tactics at large companies such as TWA and Blockbuster, where he acquired controlling stakes and forced them into line on their cost structures and failure to pursue strategic tie-ups. In the interview with The Washington Post, Icahn, 86, said he is now working to persuade the large index funds that own shares in McDonald’s and Kroger to support him in his bid to replace two members of each company’s board with experts on social issues.
“What’s gone on in the last five years is inordinate power has gone to the index funds,” Icahn said. “Hopefully if this power is used, it will force CEOs to become much more accountable, which will help our economy.”
McDonald’s said in a news release last week that Icahn’s demand for the company to source pork solely from suppliers who house pigs without using crates is “completely unfeasible” because there are far too few “crate-free” suppliers in the market to support demand.
Kroger spokeswoman Kristal Howard said in an email the company is committed to working with its suppliers to support animal welfare and is making significant investments to raise the hourly wage of its employees.
Shareholders in public companies have long wielded power to force change. In addition to proposing resolutions on hot-topic issues at the annual shareholder meeting and putting them to a vote, activists sometimes build an ownership stake in the company to increase their power over which directors get elected to the board, and in turn, their leverage over key issues facing the company.
Musk was initially expected to take this path when he disclosed he had acquired the 9 percent stake in Twitter earlier this month. Quickly, he showed his hand on the issues that mattered to him.
In a tweet in late March, Musk said, “Given that Twitter serves as the de facto public town square, failing to adhere to free speech principles fundamentally undermines democracy.”
Twitter CEO Parag Agrawal said Musk rejected a board seat, something that would have limited him to a stake of less than 15 percent.
Musk spoke at a TED conference earlier this month after launching his hostile takeover bid, taking issue with permanent bans for users and calling for Twitter to make its algorithm public. One pressing question following the sale is whether he plans to reinstate former president Donald Trump, who was banned from the site following his role in the Jan. 6 insurrection at the Capitol.
“My strong intuitive sense is that having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization,” he said earlier this month. “I don’t care about the economics at all,” he added.
While his pitch to the public largely revolved around the censorship issues, Musk also appealed to shareholders on the grounds that his offer was their best chance to cash out. In a series of tweets, he stated his wish that all shareholders should get to vote on his offer, and teased the possibility he could push for a tender offer directly to investors — a traditional route for hostile takeover attempts when a board rejects their advances.
Three days before closing the acquisition, Musk also held a series of private Zoom discussions with top executives at big investment firms geared toward getting their support for the takeover bid, according to one of the people briefed on the meetings who spoke on the condition of anonymity to discuss sensitive matters.
Had Twitter rejected Musk, the billionaire may have found it difficult to move forward with his bid because of defensive measures the company had in place designed to stop takeover attempts, governance experts said. The day after his initial offer, the board adopted a “poison pill,” a measure designed to make it difficult to buy a firm without negotiating with the board.
Twitter’s board also has what’s known as a “staggered” structure, meaning shareholders vote for different groups of directors each year. If Musk tried to wage a campaign to add his own directors to the board, he would only have been able to replace a few board seats next year, and not the majority necessary to approve a buyout offer. The company is currently proposing to remove this staggered structure in the coming years.
In many ways, the Musk deal is an anomaly. According to Dealogic, which tracks data on corporate mergers, there have only been six hostile takeovers of U.S. firms larger than $44 billion since 1995. Over the same period, no individual person before Musk has ever completed an unsolicited takeover of a company worth more than $20 billion.
One lesson all businesses can take from the deal is that no company is too big to be bought out, said Charles Elson, the founding director of the University of Delaware’s Weinberg Center for Corporate Governance.
“Everyone at some point could be vulnerable if the right person comes around with the right amount of money,” Elson said.