M&A Special - Elon Musk x Twitter
Deal Overview
Acquirer: Elon Musk
Target: Twitter Inc.
Total Transaction Size: $44bn ($54.20 per share)
Close Date: 2022
Acquirer Advisors: Morgan Stanley, BofA Securities, Barclays
Target Advisors: Goldman Sachs, J.P. Morgan, Allen & Co.
On the 25th of April, Twitter Inc. (NYSE: TWTR) accepted an offer to be acquired by Elon Musk for $54.20 a share - a $44bn deal. Twitter shares popped over 5% as a result. This transaction is set to be the largest social media acquisition in history (see below). Once complete, Twitter Inc. will become a privately held company as Elon aims to delist it from the stock market. The offer price represents an approximate 38% premium to Twitter’s share price on the 1st of April ($39.31), the last day of trading before Elon Musk announced his 9% stake in the company.
Twitter is the biggest social media acquisition
Overview – Elon Musk
Elon Musk is a South African-born entrepreneur and billionaire best recognised for his involvement in the success of numerous businesses such as Tesla, PayPal, and SpaceX. Musk’s fearless and innovative nature has propelled him to become one of the richest men in the world. His journey as a tech entrepreneur began after he dropped out of Stanford in 1995 to focus on his business X.com which later merged with another company and became PayPal. Musk’s eccentric personality has further catapulted his popularity among Gen-Z with the price of Dogecoin (DOGE) – amongst others - highly impacted by his tweets.
Overview – Twitter
Twitter Inc. is a highly influential social media platform that hosts some of the world’s most important politicians, celebrities, and personalities. With 229 million daily active users, Twitter has established itself as the world’s primary discussion forum. In its most recent Q1 2022 earnings call, one that could be its last, Twitter announced an EPS of $0.04 vs analyst expectations of $0.03 and revenue of $1.2bn vs analysts’ expectations of $1.23bn.
Strategic Rationale
As one of the earliest forms of social media to become mainstream, Twitter has heavily underperformed its competitors such as Meta Platforms (NASDAQ: FB) and Snap Inc. (NYSE: SNAP) - see below. However, this hasn’t deterred Elon Musk. “I don’t care about the economics at all” said Musk in an interview after announcing his offer. His vision for Twitter is something that goes beyond quarterly revenue and EPS.
Twitter has underperformed its peers
Musk has already outlined key changes he is planning to make, some of which include switching the Twitter algorithm to open-source which would promote transparency and allow users to suggest changes and improvements, cracking down on spambots, “authenticating all humans”, and implementing a fee for commercial users. “Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated,” tweeted Musk.
Another interesting point to note is the possible influence and involvement of China because of this deal. Tesla’s second-largest market in 2021 was China (after the US) with a YoY revenue increase of 52.8% to $4.65bn in Q1 2022. China is also Tesla’s largest lithium battery supplier. In 2009, the CCP banned Twitter because the government had no leverage over the platform. This acquisition may pose some complications for Elon Musk with regards to the newfound leverage the Chinese government may have over Twitter now.
As mentioned earlier, the large emphasis on promoting free speech may be backed by some ulterior motives. In January 2021, Donald Trump (@realDonaldTrump) was permanently banned from Twitter after the raiding of the US Capitol building. Musk highlighting the importance of free speech may see him reinstate Trump’s Twitter account which could reignite former political disputes.
Deal Structure
As one of the largest leveraged buyouts of all time, Elon Musk has secured a huge amount of funding to facilitate the takeover. As of the 25th of April, according to SEC filings, Elon Musk pledged $21bn of his own cash along with $13bn in bank loans and another $12.5bn in margin loans against an eyewatering $62.5bn of Tesla stock as collateral (NASDAQ: TSLA - see below). Musk has also stated he is planning to take Twitter public again within 3 years of his acquisition.
Deal structure of the Twitter buy-out
The source of Musk’s $21bn cash contribution is still unclear. Elon Musk has stakes in numerous different companies whose value greatly eclipses that of this deal. The most logical conclusion is that Musk sold some of his Tesla stock, which at the time of the deal announcement was valued at $978 per share. SpaceX was also valued at more than $100bn last year. Morgan Stanley is the largest lender in this deal as they contribute a total of $5.5bn towards the acquisition, a loan far larger than they have ever granted Musk before.
One major concern for Tesla shareholders is if Tesla stock had fallen below $520 per share, Elon Musk would receive a margin call on his Tesla-backed loans This means that if Tesla stock was to fall below $520, Elon would be forced to sell his shares in the company to pay Morgan Stanley for the loan, creating major downward pressure on the stock.
In a turn of events, on the 13th of May, Musk announced he had secured $7bn worth of equity commitments from various entities, 18 to be exact. Some of which include the likes of Crypto broker Binance pledging $500m and VC house Sequoia Capital contributing $800m. These additional equity contributions will take some pressure off Elon’s margin loan against Tesla stock. This is a clever move in a volatile market where the value of equities can swing unpredictably.
In another unforeseen turn of events on the 17th of May, Elon Musk called out current Twitter CEO Parag Agrawal to provide him with data on the number of ‘bot accounts’ on the platform. Musk tweeted about how the “deal cannot move forward until he does”. Twitter shares have dropped considerably since the announcement. Twitter claims less than 5% of its monetizable daily active users (mDAUs) are so-called ‘bots’. Musk openly disagrees with this number as he jokes about it in a recent interview. As of now, the deal is on hold. There have been several rumours suggesting Musk is renegotiating a cheaper price for Twitter. This recent hold-up due to bot uncertainties may just be a cunning way of achieving this.
Outlook & Opinions
This acquisition seemed like the perfect move for Musk to broaden his horizons into the social media space. However, the fact that there were no other public bidders before Musk could show how difficult of a job it may be to comprehensively improve Twitter as a platform.
In April, European policymakers reached an agreement on new legislation called the ‘Digital Service Act’. This Act requires social media platforms like Twitter to more vigilantly police for hate speech, misinformation, and illicit content. This may pose an issue to Musk as he continuously reiterates the mantra of how Twitter should embrace free speech. Having tighter regulations may obstruct this key goal.
In 2021, Twitter generated revenue of $5.1bn of which roughly $4.5bn came from advertising services and about $570m from data-licencing. That’s about 88% of total revenue which came from advertising services. If Elon Musk pushes the agenda of true free speech, Twitter could turn into a breeding ground for hate speech, fake news, and bullying, something that Wall Street analysts say could alienate advertisers. Without advertising revenue, Twitter would lose most of its annual revenue which would cause the company to collapse.
Going forward, Elon Musk holding Twitter in his portfolio will no doubt increase his already mammoth influence in this modern age of digitalisation. With his growing presence and 90m+ followers on Twitter, Musk is certainly a growing figure within business and politics. Having one of the world’s most powerful political and social tools in the hands of one person may yield unexpected consequences which could ultimately transform the social media landscape as we know it.
I hope you enjoyed the article!
See you next month,
Andre
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.