Well that was weird. On Tuesday I wrote a column saying it was unlikely that Elon Musk will buy Twitter Inc. On Wednesday I left on a family vacation. On Thursday, for my sins, Elon Musk announced an offer to buy Twitter for $54.20 per share in cash. 420 is a weed joke.
I suppose this increased the probability that Elon Musk will buy Twitter? By a little? Yesterday Twitter’s stock managed to close down 1.7%, at $45.08, suggesting that the market puts a somewhat lower probability on Musk buying Twitter after he formally proposed to buy Twitter than it did before.
Musk has some history here: In 2018 he pretended that he was going to take Tesla Inc. private; he wasn’t, and eventually he settled fraud charges with the US. Securities and Exchange Commission. Ordinarily if a billionaire chief executive officer of a public company offers to buy a company, the odds that he is kidding are quite low. When it’s Elon Musk, the historical odds are, like, 50/50. (He really bought SolarCity.)
By Thursday afternoon, Musk went onstage at a conference — honestly itself a weird thing to do in the middle of a hostile takeover or whatever? — and said words that I think a connoisseur of mergers and acquisitions, or of Elon Musk, will interpret to mean “okay sure I was kidding a little”:
“I am not sure that I will actually be able to acquire it,” the billionaire entrepreneur said Thursday at a TED event in Vancouver. Musk said he has a Plan B if Twitter rejects his offer, without offering more details.
Musk said his intent “is to retain as many shareholders as is allowed by the law in a private company.”
When Musk was pretending to take Tesla private, he pretended that he was going to let all of Tesla's existing shareholders remain shareholders of the new “private” Tesla. This is not a thing, and it was never going to work, but it was a nice friendly promise for Musk to make given that he was never going to take Tesla private. And now he’s doing it again, saying that he will take Twitter private while also keeping as many existing shareholders as he can. Sure buddy!
One problem with Musk’s offer is that it is pretty low. Musk points out that $54.20 “represents a 54% premium” over where he started investing in Twitter, and a 38% premium over where the stock was before he announced his position. But Twitter was in the $60s in October, and a lot of its big long-term holders seem unlikely to be sellers at $54.20. “‘No board in America is going to take that number,’ said Jefferies analyst Brent Thill.”
To be fair to Musk, in this deal, he is not pretending to have financing. His offer to Twitter’s board is contingent on “completion of anticipated financing,” and when Musk answered questions at that conference yesterday, one of the questions was of course “do you have funding secured,” and his answer was “I have sufficient assets.” Which means no! “Yes” means yes. “I’m really rich, surely someone will give me the money” means no one has yet.
Now, he’s right that he’s very rich, so it’s not at all impossible for him to finance this offer. Musk will need about $40 billion to buy the 91% of Twitter that he does not currently own at $54.20 per share. He owns about 172.6 million shares of Tesla Inc. stock, worth about $170 billion at yesterday’s closing price, plus more shares underlying stock options. He has pledged about 88 million of those shares to secure personal loans, but if he sold the other 84-ish million that would raise about $60 billion after tax, more than enough to pay for Twitter. That would be a pretty extreme move, though. Musk seems to … enjoy … Tesla, and dumping half his stock would both (1) drive the stock price down a lot and (2) signal to the market that he has found a new toy and lost some interest in Tesla. That seems impulsive even for him, though he did sell about 10% of his Tesla stock late last year sort of due to a Twitter poll so it is certainly possible. Tesla’s stock closed down yesterday, I guess on the threat of massive sales.
There are other options. A traditional leveraged buyout of Twitter — buy Twitter with money borrowed against Twitter’s business — seems implausible for reasons we discussed on Tuesday; Twitter just doesn’t have that much debt capacity. (It has a few billion dollars of bonds outstanding, but those would have to be paid back at a premium if Musk bought Twitter, further increasing the cash needed to do the deal.)
Enlisting an equity partner to write a big part of the check seems tough — why be the junior partner on Elon Musk’s whimsical trolling expedition, in which he has said publicly that “I don’t care about the economics at all”? — though the Wall Street Journal reports that “Mr. Musk has heard from outside investors who may be interested in teaming up for his bid.” Perhaps some equity partner will take a gamble on the possibility that, at a private Twitter, Musk will be in charge of memes and trolling, and his partner will be in charge of, like, finances and strategy. Or perhaps he could get a league of libertarian billionaires together to buy Twitter as their collective toy.
Or Musk could borrow more against his Tesla stake. Tesla’s own policies prohibit Musk from borrowing more than 25% of the value of his shares, which is barely enough to buy Twitter, even ignoring the fact that he has already used at least some of that capacity. Of course he’s in charge of Tesla and its board is famously deferential to him, so I guess he could change those policies, but that still requires finding a bank to lend him $40 billion against his Tesla stake to finance this lark. Tesla’s stock has quadrupled since mid-2020; if it fell back to mid-2020 levels — say because its charismatic attention-seeking CEO found a new toy — then the loan would be underwater, and selling out of a gigantic Tesla margin loan does not seem like a lot of fun for a bank.
You can patch these things together — some Tesla margin borrowing, some Tesla sales, some Twitter leverage, some equity partners, etc. — and probably get to $40 billion, but the financing seems tricky. And when he was asked directly about it in public, Musk did not exactly try to reassure anyone; he didn’t say he had financing, and he did say “I am not sure that I will actually be able to acquire it.”
That said, his securities filing does say that he has hired Morgan Stanley as his financial adviser. Presumably they are aware of this; like, they are investment bankers and understand that if you sign a deal to pay $40 billion for a company you need to come up with $40 billion. Presumably they want to earn a fee, which ordinarily only happens if you do a deal, so they have some reason to be confident, and some incentive to stretch to provide financing themselves. Lending the world’s richest man a few billion dollars to earn an M&A fee would not be all that weird a move for a bank to make. And Twitter has engaged Goldman Sachs Group Inc. to evaluate his bid; they also understand this and will, you know, ask.
Still I imagine that Twitter's bankers at Goldman Sachs will sit down with Musk's bankers at Morgan Stanley and Goldman will say “so uh where's the financing coming from” and Morgan Stanley will say “oh the financing is in this can” and hand Goldman a can and Goldman will open the can and a bunch of fake snakes will pop out. “AAAHHH,” Goldman will scream, and then they will chuckle and say “oh Elon, you got us again” and everyone will have a good laugh. Because, again, uniquely among public-company CEOs, Elon Musk has in the past pretended he was going to take a public company private with pretend financing! I am not saying that he’s joking now; I am just saying he’s the only person who has ever made this particular joke in the past.
Bloomberg
