Twitter just evoked a 'poison pill' defense to ward off a takeover bid from Elon Musk. Here's how it works.

• A poison pill defense dilutes a company's shares, making it more difficult and costly to buy.
• Twitter's board said Friday it would use one to try and avoid Musk's bid for acquisition.

It's hard to swallow.

That's the thing about the poison pill, a technique that is set to be employed by Twitter's board, per a Friday announcement, to defend the company against Elon Musk's offer to buy the company for $43 million.

The poison pill, more formally known as a shareholder rights plan, essentially devalues each share in a company by increasing the total number of shares — making it harder for any person or group to acquire all of a company's stock.

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Musk now owns 9.1% of the company at 73.1 million shares, per the Wall Street Journal. In its most recent earnings release, the company reported 797.6 million shares outstanding for the year ended Dec. 31, 2021.

Twitter said Friday that its shareholder rights plan would kick in for other shareholders if any "entity, person, or group" (read: Musk) obtained more than 15% of Twitter's outstanding shares. Under the plan, current shareholders would then be able to buy further shares at a discount, resulting in a lesser stake for whomever — Musk, in this case — owns a 15% stake.

In more elevated terms: "It's a defense measure by boards to increase the amount of shares and or give a discount to current shareholders so it makes it incrementally hard for a potential acquirer to go after the company because it's prohibitively expensive," Daniel Ives, managing director at Wedbush Securities, told Insider.

Twitter announced it would be employing the tactic following unanimous consent from the board and again called Musk's offer "an unsolicited, non-binding proposal."

Twitter had long been a target for this sort of thing with the departure of former CEO Jack Dorsey in November 2021, added Ives.

"There was an opportunity to strike while the iron is hot," he said.

Reuters reported Friday that Thoma Bravo, a private equity and buyout firm, has told Twitter of its interest in putting up a competing offer to buy the company.

But Ives thinks the Musk gambit could be successful, though Musk and Twitter could end up battling it out in court.

"We believe that Musk is going to end up owning Twitter at the end of this soap opera," he said.