Twitter: Elon's Doobie Deal

Up in smoke?

Apr 17, 2022

You have to hand it to Elon Musk. He certainly keeps things interesting. And so educational. In just the past few days, while reading about Musk’s latest maneuvers, I have learned more about Twitter, Elon Musk, the law relating to SEC Reg 13 filings, margin loans and so much else. Like the history of Weed Day, for example.

Yes, Weed Day. Call me naive—I attended college in the 1970’s, but like Bill Clinton I did not inhale—but for whatever reason I did not know about Weed Day or the significance of the number 420 to certain segments of the smoking population. And this bit of cannabis culture may perhaps offer some insight into Mr. Musk’s thinking. The number 420 features prominently in Musk’s offer to buy Twitter (priced at $54.20 per share) as well as in his 2018 Tesla going private post (at $420 per share). But if the number 420 is that significant to Mr. Musk, as some think it is, why didn’t he wait to announce his Twitter offer until next Thursday, April 20th, on Weed Day itself? He could then very credibly have claimed to be the highest bidder. (All weed puns intended.)

But seriously, what are we to make of Elon’s doobie deal? Does he really want and intend to take over Twitter? Or could this be yet another example of apparent market manipulation by Musk, facilitating his own sale of Twitter shares, leaving others with big losses and him again in hot water with the SEC?

I am not sure what to think about all of this, in part because of the crazy way this story has played out over the past ten days or so. First was the unanticipated news that Musk had purchased 9% of Twitter. Then the news of Musk accepting and subsequently declining a Twitter board seat, followed by a series of ill-tempered tweets some of which were quickly deleted. And finally his offer to buy all of Twitter for $40bn in cash, which he doesn’t have, communicated by text message and announced (of course) on Twitter. On the off chance that you were away from planet Earth for the past ten days and missed all of this, you can catch up on the news using the links provided below. Just reading the headlines will give you a sense of how this story has progressed, which is enough to give one the spins.

Has Musk actually made an offer to buy Twitter? Yes, it appears that he has indeed made an offer of sorts, but it is a conditional one. What Mr. Musk submitted to the board of Twitter seems to be a non-binding proposal to acquire all of the outstanding shares of Twitter which he does not already own at a price of $54.20 in cash, subject to financing which is still to be arranged. His offer was communicated to the Company via a scripted text message and announced publicly on Twitter, which is unorthodox on Wall Street but par for the course in Musk World.

Does Musk have the financing to buy Twitter? No he does not, or at least not yet. And Musk’s offer as communicated to Twitter makes this perfectly clear. Unlike in 2018, there is no misleading tweet of “funding secured”, which resulted in securities fraud charges brought against Musk by the SEC. (In settling the charges, Musk was forced to pay a $20mm fine and give up his role as as Tesla’s chairman for three years.) But does Musk actually believe he can raise the money this time? And if so, can he?

Musk’s bid to buy the balance of Twitter’s outstanding shares will cost him around $40 billion at the announced deal price of $54.20, which excludes the cost of the 9% stake that he already owns. (I am rounding some numbers here.) Musk reportedly has a personal net worth of around $250 billion and he says that he has “sufficient assets” to finance his bid for Twitter. But that isn’t exactly the point. To buy Twitter Mr. Musk needs to turn a large portion of his personal assets into cash—another $40bn or so—and at this point in time it is far from clear how he will do this. Until Musk has the cash, he can’t buy the Twitter shares.

So where might Musk get the cash?

Perhaps Musk’s bankers at Morgan Stanley can piece together some amount of non-recourse leveraged financing against Twitter’s own assets and cash flow to cover part of Musk’s bid. Twitter seems to have about $4bn of excess cash on its books and it has been buying back shares, so perhaps there is some excess cash flow and credit capacity here. But this will be hard to pull together in advance of a formal offer without the cooperation of the Company (which Musk does not seem to have). On the surface, Twitter would not seem to be a great candidate for a large leveraged financing of the sort employed in traditional LBOs, even before the financial uncertainties associated with whatever new business plans Musk may have in mind for Twitter. And so we probably should not expect to see much funding for Musk’s bid to come from this source.

Musk might also seek to raise a portion of the funding from margin loans secured by his equity stakes in Tesla or his other companies (eg SpaceX). But this may be harder to do than it might seem at first glance, at least vis a vis Tesla. It appears that Musk currently owns about 176mm shares of Tesla, conveniently worth $176bn at the current price of $1,000 per share. Tesla’s corporate policy limits the amount of margin loan debt which can be incurred by its officers and directors to 25% of the market value of their shares, which would seem to give Musk and his bankers some room to maneuver, at least at the current TSLA share price. However it seems that Musk has previously pledged about half of hisTesla stake (88mm shares, according to Tesla’s 2021 proxy statement), securing an unknown amount of existing personal debt. This could complicate things considerably for raising a large new margin loan, even if the lenders are willing.

More promisingly, perhaps Musk is planning (or at last willing) to share his future ownership of Twitter with other like-minded investors. There is a lot of private equity “dry powder” waiting to be invested, including at several firms known to be interested in Tesla. But whether these folks will want to co-invest with Musk, or might prefer to make their own competing bids, is far from clear.

Or perhaps Musk will find some way to acquire control of Twitter himself without buying 100% of the shares. It could be that all he needs is to acquire a sufficiently large stake—more than 10% but perhaps less than 50%—to end up with effective (but not legal) control of the Company. It is not clear to me how this might work, particularly now that Twitter has adopted a poison pill (which kicks in at a 15% ownership position), but it would certainly reduce the amount of funding which Musk needs to raise.

And so it is far from clear how Musk will raise the funding for this deal. But he has Morgan Stanley on board as his financial advisor and they would not have taken this assignment if they didn’t think they could raise the money. Or would they?

Will Twitter’s shareholders sell at $54.20? Twitter shares closed the week at $45, a 17% discount to Musk’s offer price, suggesting that the stock market is not yet convinced that Musk will close this deal any time soon or that a higher bid will emerge. But if Musk can arrange the financing and somehow win the support of the board, would Twitter shareholders be prepared to sell at this price?

Musk’s offer price of $54.20 represents a 52% premium to where the TWTR shares were trading before he started buying them several weeks ago and a 38% premium to the market price before he filed his first 13D (but after he had acquired his 9.2% stake). These are healthy premiums by historical M&A market standards, but we have to ask: premiums to what?

Prior to Musk’s emergence, Twitter shares were trading in the range of $35-40, a big discount to its all-time high of $72 in February and June of last year. Some have suggested that this demonstrates Musk’s intention to buy control of Twitter ‘on the cheap’. Others would interpret this as evidence that Musk’s bid is in fact fair and more than fully priced. But how will the Twitter board interpret these market signals? Will they try to shop the company for a higher bid, negotiate Musk up in price, or hide behind their poison pill and just say ‘no’?

Will the Twitter board support Musk’s bid? This may not seem likely now, but we should never say ‘never’. The Twitter board has now adopted a poison pill, which is not a show stopper but which will force Musk to negotiate with the board rather than proceed to a hostile (unsolicited, non-board approved) tender offer made directly to the Twitter shareholders, which is perhaps what Musk had in mind. The pill will also buy the board additional time to seek other competing offers if they decide to sell the company, which they may or may not elect to do. The “just say no” takeover defense got a bad name during the 1980s, but as far as I know this is still a viable legal defense strategy in appropriate circumstances, which may be the case here.

But what are the legal obligations of Twitter’s board in this context, you might ask? Simply put, the obligation of the directors of a US business corporation (public or private) is generally to act at all times in a good faith fiduciary capacity, making board decisions in an informed and responsible manner (the duty of care) and in the best interests of the company (the duty of loyalty). In this context, the best interests of ‘the company’ is generally interpreted to mean in the best interests of all the company’s shareholders, not just selected shareholders (eg Musk or a PE investor represented on the board.) But in appropriate circumstances, the board may also consider the interests of other company ‘stakeholders’ as well, including in Twitter’s case users, customers and employees.

Once the board decides to sell the company, however, its duties shift—to finding the best possible offer and maximizing value for shareholders. This is the so-called Revlon duty of the board, but in the Twitter case we are not yet there and we may never get there if the board decides that now is not a good time to sell. The fact that Elon Musk showed up with an unsolicited high-premium bid may put pressure on the board to sell, but it does not force them to sell, at least not if Twitter’s shareholders remain ambivalent to the bid(s).

But however the Twitter board views its responsibilities, and whatever the various strategic alternatives available to the Company at this time, the directors will have to take a view on whether Musk’s going private proposal is in the best interests of the Company. This will require asking and answering some tough questions. Is selling the Company now the best way to maximize shareholder value over time? And if so, is Elon Musk the best owner for the Company or are there other credible and capable parties who might be better owners and who are prepared to outbid Musk? Alternatively, can Twitter’s current management team execute on the Company’s business plan and deliver more than $54.20 of (present) value over time? These are not the only questions Twitter directors will be discussing, but they are important ones and how they answer them may well decide the fate of Musk’s offer.

What will be the future of the Twitter platform under Elon Musk’s control? This too will be a fundamental question for the Twitter board to ask in deciding how to respond to Musk’s bid, at least if they take a ‘stakeholder’ view of corporate governance. But it will be a tough one for them to answer unless both Musk and the Company are prepared to engage with one another openly, which will not happen if they continue to communicate primarily by text and tweet.

I won’t even attempt to offer my own view on this question, which would be a highly uninformed one even by Twitter standards, but I think it is fair to say that the jury is still out on the merits of Elon Musk taking control. Mr. Musk is by all accounts brilliant, creative and highly energetic and he may well be exactly what Twitter needs if it hopes to prosper in the coming years. Or perhaps not. Mr. Musk is also unpredictable and unreliable and he occasionally demonstrates a blatant disregard for social norms and the rule of law. Many believe that Mr. Musk’s political leanings would skew the content on Twitter in favorable or unfavorable directions, but Musk’s political views may not be as consistent as many seem to think. And he is unlikely in any event to make decisions on content regulation or related matters in a manner which destroys the economic value of the Twitter platform. If there is one thing Musk knows how to do well, it is to make money. And so it is far from clear to many—including perhaps a number of Twitter directors— if Elon Musk is the sort of person who should be in control of a large social network like Twitter. And if not, should Twitter sell him the Company?

What should we expect next? I have no idea, but this safari is far from over and we should all expect some interesting and unanticipated new developments in the days, weeks and possibly months ahead, including the possibility that Musk may at some point reverse course entirely. So watch this space for more news and views.

In the meantime, if I don’t write again before then, let me wish any Waldos out there a happy Weed Day. I will look for your 420 posts on Twitter.

Links:

Elon Musk Buys Surprise Stake in Twitter, Sending Shares Higher, WSJ April 4, 2022

Elon Musk to Join Twitter Board as Largest Shareholder, WSJ, April 5, 2022

Elon Musk Decides Not to Join Twitter Board, WSJ, April 11, 2022

Elon Musk Offers to Buy Twitter at Valuation of $43bn, WSJ, April 13, 2022

Disclosure Lawsuit Complicates Musk Bid for Twitter, NY Times, April 14, 2022

Can Musk Actually Buy Twitter?, WSJ, April 14, 2022

Musk Gives Twitter Board an Expensive Out, WSJ, April 14, 2022

Twitter Board Adopts Poison Pill, WSJ, April 15, 2022

Musk Contends Censorship not Abuse is Twitter’s Problem, WSJ, April 15, 2022

How Elon Musk made his Fortune, WSJ, April 15, 2022