On April 14th, 2022, Elon Musk dropped a bombshell on Wall Street by announcing his bid for a Twitter takeover. It was reported that he has been buying up Twitter shares since January 2022, and by April, his stake reached 9.2%, valued at $2.9 billion, making him the company’s largest shareholder. Parag Agrawal, Twitter’s CEO, invited him to join the Board of Directors (BOD), and as a part of the agreement, Musk would have committed to not acquiring more than 14.9% of the company’s shares during his term. Shortly after, Elon refused the offer and announced an attempt for a $44 billion acquisition of the social media company. In a leaked email to Twitter’s Chairman, he described this as the “best and final offer.” On April 25th, Twitter unanimously accepted the offer, but Musk got cold feet as he questioned the company’s honesty regarding the percentage of bot users. After reading the timeline of this confusing takeover attempt, a lot of unanswered questions come to the surface, so let’s make some sense of it.
Unlike his fellow billionaires, Elon is an active Twitter user. Other than making announcements about the progress of his companies, he also finds time to share memes, interact with his audience of over 90 million followers, comment on the political turmoil, and make speculative posts that affect the trading price of Tesla shares and cryptocurrencies like Dogecoin. There is a significant amount of people who go as far as to consider him as the person who will inevitably save our planet from global warming and make human life multi-planetary (i.e., colonize Mars). It’s not hard to imagine how much influence this audience of fanboys can give to a person like Elon. However, he seems to have a record of sharing misleading tweets. In 2018, Musk got in trouble with Tesla shareholders, who launched a class-action lawsuit over his false statements about securing the funding to privatize the company at $420 per share. He went on to make several follow-up tweets mentioning his talks with the Saudi Arabian sovereign wealth fund as being very productive, which only added fuel to the fire. It was not long until The U.S. Securities and Exchange Commission (SEC) decided to investigate and consequently charged Musk with civil securities fraud, which he described as “a forced and unlawful concession to the SEC.” According to Judge Edward M. Chen, the judge presiding over the case, Musk knowingly made false statements about securing the funds when he published the tweets. Luckily for the billionaire, the lawsuit ended with a $20 million fine settlement and an order not to post tweets without consulting Tesla executives beforehand.
The lawsuit is only one example of Musk’s reckless behavior on social media, but you get the idea. If his social media presence can be summed up in one word, it would be described as unaccountable. Elon Musk uses the Twitter platform to its best advantage, arguably much better than anyone similar to his profile and audience, making social media his vehicle for selling his corporate vision and product. Ahead of announcing his initial purchase of Twitter shares, Musk heavily criticized the company for not adhering to the basics of freedom of speech and its content moderation policies, even going as far as polling a question to his followers if he should start an alternative social media company. The confusing part of this saga is why Elon Musk pursued the acquisition instead of joining the Board of Directors. He could’ve influenced Twitter’s business model and policies through his seat on the Board, but he chose an alternative route.
Finance 101: How Musk Funds Twitter’s Acquisition
When you are the wealthiest man on the planet, worth over $200 billion, you can buy virtually anything your heart desires. For the Twitter takeover, the billionaire opted for what is known as a leveraged buyout (LBO). LBOs are most commonly performed by private equity firms to privatize a publicly-traded company because they believe they can improve the company’s efficiency and sell it back at a higher valuation for a profit. This type of financial transaction is carried out with a combination of equity and debt, where debt is usually substantially larger than equity; hence the word “leveraged.” The key to an LBO is that the loans are borrowed based on the target company’s assets which are used as collateral, meaning the buyer bears the least risk if the target company goes belly up. When it comes to the amount of debt borrowed, it can’t be more than the target company can service. In simple terms, the acquirer must be certain that the acquired company has a credible and healthy cash flow to repay the debt.
Elon Musk’s LBO of Twitter is quite different from a traditional one in several measurements, as it appears he is acting as a private equity firm. Initial SEC filings made by Musk reveal where he got the money. The tech mogul pledged to finance approximately $33.5 billion out of $46.5 billion, directly or indirectly out of his pocket. The $33.5 billion is broken down into two parts: $21 billion in equity and $12.5 billion in margin loan commitments provided by Morgan Stanley Senior Fund backed by Musk’s Tesla shares. The rest, $13 billion of commitments, comes from a syndicate of banks as debt injections into Twitter. As a result, Musk’s total commitments comprised approximately 72% of the financial package, which is above average for a traditional LBO where equity makes up around 40%-45% of the deal. Margin loan, especially during a market downturn, is a risky way to finance an acquisition. At the end of the day, nobody can be sure how the stock will perform today or a month from now. The concept of a margin loan is simple. If a significant decrease in the value of the borrower’s collateral occurs, the margin loan provider has the power to either ask for additional cash or trigger a margin call. A margin call is when the lender takes possession of the assets that the borrower used as collateral to get the margin loan approved. Musk’s $12.5 billion margin loan allowed him to borrow against the value of his Tesla shares, worth over $60 billion, but what followed next was a financial rollercoaster. Tesla shares, just like any other comparable growth stock, are volatile. If Tesla stock were to plummet below $740, it would effectively trigger a margin call and force Musk to come up with more collateral. To avoid it, he scrapped the margin loan altogether while increasing his initial equity to $33.5 billion, up from $21 billion. Now, the $13 billion in loans to Twitter also seem at risk as the deal is put on hold over a dispute associated with bot accounts on the social media platform.
For every success story, there are people behind the scenes who don’t get the spotlight. For Elon, it’s Jared Birchall whose job is to manage Musk’s family office, Excession. In 2010, Birchall joined Morgan Stanley’s Wealth Management team and ended his journey at the bank in 2016 when Musk snatched him to set up Excession. Apart from getting loans from the big banks at Musk’s every whim, Jared is also listed as a top manager in most of the billionaire’s corporations, including the Musk Foundation. The right-hand man also managed the sale of his properties, arranged private jet flights, and even did some of his dirty work, such as digging up dirt on a man who criticized Elon’s suggestion to use a SpaceX submarine to rescue a trapped soccer team in Thailand. Throughout Elon’s takeover attempt, Jared did not remain on the sidelines. According to Bloomberg, Birchall played an active role in helping Musk get the margin loans approved as well as acting as a bridge between the billionaire and a syndicate of banks for the $13 billion debt financing for Twitter. Now, it seems like Musk has everything on his side to go through with the acquisition: an army of fanboys excited about his attempt to disrupt yet another industry, a trusted right-hand man helping to get the loans from the banks approved, and ambitions of earning the title of a “free speech fighter” in the eyes of the world. However, Musk seems to experience buyer’s remorse as he brings up the issue of bots on the social media platform. Is the problem as significant as Musk portrays it, or is it nothing more than about gaining leverage to snatch Twitter at a bargain?
Why The Bot Issue Halts The Deal?
According to The NYT, who managed to get their hands on Elon’s pitch deck for investors, the tech mogul has incredibly zealous plans. Musk’s goal is for Twitter to stop relying on revenue from advertisers, which is the typical business model for competing social media companies. Instead, he plans to introduce a “slight cost for commercial/government users” while increasing Twitter’s annual revenue to $26.4 billion by 2028. By then, he hopes to increase its user base to 931 million with an average revenue per user of $30.22. He also plans to introduce a mysterious new product called “X” and, by 2028, have 104 million subscribers for it. It is hypothesized that one of the features for “X Subscribers” would be a completely ad-free experience. All of the above, coupled with increasing the number of employees to 11,000 by 2025, seems to be on the borderline of unrealistic and highly ambitious. It is still unclear what features Musk wants to add, but at the end of the day, it all depends if Twitter users paying for the services will see a considerable value.
Elon’s goals may look fascinating on a PowerPoint presentation, but all of them are crushed by his claim suggesting that as much as 90% of Twitter users are bots or spam accounts. While his claim may be overinflated, more conservative researchers believe the number to be hovering around 15-20% of Twitter’s traffic. How did bots and spam accounts appear on the platform in the first place? Essentially, bots are automated software programs created by third-party vendors that would be tasked to do something that a human would otherwise do monotonously, such as data scraping, parsing large data sets for research, and automating replies. Samuel Woolley, assistant professor at the University of Texas at Austin, dives deeper into the problem as he explains the nature of these bots. According to Woolley, Twitter’s open API is to blame for the issue. Open API was an invitation for developers to create bots and for Twitter to open the door to fake traffic, which advertisers on social media hate a lot. Here’s the deal: almost all social media companies generate revenue through advertising, meaning their business model is based on the number of users spending time within their apps. Put simply, more users = more revenue; hence, their valuation also depends on the number of active users. What happens when people discover that the platform’s active user count is artificially inflated by the presence of bots? Advertisers are less likely to spend money, real users start questioning the virality of posts they see on the app, and Wall Street analysts are forced to readjust the company’s forecasted earnings. On top of everything else, it becomes harder for Elon to justify the $13 billion debt injection into Twitter if loan repayments depend on revenue the company receives from advertisers. As Musk is going through Twitter’s data on active users he received earlier this month, he’s hoping to find an issue to exploit to either increase his negotiating power over the price of the deal or exit from it altogether.
Twitter’s Place In “Musk’s World”
Back in 2017, Musk purchased the X.com domain from PayPal. The domain was used by Elon’s online banking company he founded in 1999. Since then, the company merged with PayPal causing Musk to sell off his stake and start SpaceX and Tesla. Now, he seems to have found a use for it other than sentimental value. The media has long speculated that at some point, Musk would follow the steps of Google and Facebook in restructuring the assets under one holding company. According to the SEC filing, Elon Musk formed three holding companies based in Delaware a couple of months earlier. All had a variation of “X Holdings” in their name, with one of them, X Holdings I, being linked to Twitter’s purchase. However, if Musk were to follow the path of Alphabet and Meta, he would find himself in a difficult spot. The only string linking Tesla, SpaceX, The Boring Company, Neuralink, and potentially Twitter, is Elon Musk. All of his current and potential companies are in entirely different industries and can hardly be linked with each other to produce enough synergy. Likewise, what happens to the investors when they realize that Musk is up for the idea of “X Holdings”? The same issue persists here since Tesla’s and SpaceX’s shareholder bases have different interests at play, and striking a balance between them can become a serious dilemma. Even Musk himself acknowledges the problem. In an interview with TED, he reiterated that there are minimal opportunities to merge operations between the companies under his leadership.
Musk is arguably the most influential corporate manager of our generation. His bets on Tesla, SpaceX, The Boring Company, and Neuralink have proven to be beyond successful. If the performance of the latter two companies will not be evident within the next couple of decades, the ambitions of Tesla and SpaceX can be our reality in the late 2020s. Altogether, they serve Elon’s futuristic vision of disrupting a multitude of industries and shaping the future of our world, which is exciting to look forward to. The future, where people drive in sustainable AI-powered Teslas from their homes in San Francisco’s Bay Area through the nearest Hyperloop station made by The Boring Company to South Texas, only to end up aboard SpaceX’s Starship flight towards the Red Planet. Whether he proceeds with the acquisition of Twitter or not, he has already caused havoc in the news, financial markets, social media industry, and even politics. Looking through Musk’s proposed future for the human race, dubbed “Musk’s World,” Twitter seems like an odd man out.