Elon Musk, #Dealmaker

The $44 billion deal proposed by Elon Musk on April 25, 2022 to take Twitter private has generated significant debate in business, social media and political realms for very good reasons. After one full day to contemplate the news, reaction in financial markets indicates those impacts are likely to take hold before any others.

The Twitter Deal Itself

The deal will essentially buy up outstanding shares for a total of $44 billion dollars so Musk can operate the company as a private entity without being subject to the pressures from public shareholders or SEC scrutiny. Twitter's board announced acceptance of the deal on April 25 and Twitter stock was down slightly even though the target price was $2.63 above the close on April 25. To examine the real impact of the deal, closing prices on a handful of key dates need to be reviewed:

• Twitter closed at $32.42 on March 7, 2022
• Twitter closed at $39.31 on April 1, 2022
• Twitter closed at $49.97 on April 4, 2022
• Twitter closed at $45.08 on April 14, 2022
• Twitter closed at $49.68 on April 26, 2022

The March 7 price of $32.42 represents a market bottom on Twitter stock, serving as a useful proxy of the most pessimistic valuation of the firm by outsiders BEFORE it became known Musk had been acquiring shares.

The April 1 and April 4 prices reflect the jump triggered by speculation after Musk announced on April 4 that he had been acquiring shares. News of that deal reflected an expectation of a 27% premium over the April 1 closing price and a 54% premium over that month-old low of $32.42.

On April 14, Musk made a public offer to buy Twitter outright for $44 billion, reflecting a $54.20 price per share. That represents a whopping 67 percent premium off Twitter's March 7 low or a mere 38% premium over the April 1 price prior to the April 4 news.

When small firms with the POTENTIAL for exponential growth opportunities are targeted for acquisition, the math behind the finances can make stratospheric premiums worthwhile. If you are buying control of a firm with a $200,000,000 valuation and net income of $15,000,000 per year that is expected to grow tenfold in five years, paying $250 million (25% premium) or even $300 million (50% premium) can make perfect sense if you have high confidence in that tenfold growth.

When deals involve any numbers with BILLIONS in them, it becomes far less likely there are any exponential growth opportunities lingering that can cover the mistake of paying a large premium to gain control of the firm. With Twitter's numbers, the Musk premium of 38 percent represents an overpayment of $12.1 billion against a baseline market valuation of $31.9 billion on April 1. But that $12.1 billion overpayment has to eventually be covered by PROFITS to make financial sense and Twitter is not terribly profitable. Here are some quick backward trends from its financials on 12/31 from 2021 back to 2019:

Revenue -- $5.1B $3.7B $3.5B $3.0 B -- 70% growth over three years -- about 19% per year
Gross Profit -- $3.3B $2.4B $2.3B $2.0B -- 65% growth over three years -- about 18% per year
Operating Expense -- $3.0B $2.3B $2.0B $1.6B -- 87% growth over three years -- about 23% per year
Net Income -- ($0.22B) ($1.14B) $1.47B $1.21B -- wild swings over three years

Assuming Twitter swings back to net income in the $1.4 billion range, it will need 8.6 years of performance at that level to make up for that premium. Now if the deal goes through, Musk won't have to worry about making that up to Twitter shareholders. He's just playing with his own money and no one will care about the accounting between Elon Musk's left pocket and Elon Musk's right pocket.

Twitter is estimated to have 400 million unique users with 206 million using the system daily. If EVERY human on the planet began using Twitter, that would cap Twitter's growth at 7.9 billion users or 19.75 times it's current scale. Clearly that won't happen but what if users grow to one billion? That's only a 2.5 multiple which doesn't justify current valuations given that operating costs are growing faster than revenue.

Musk has also hinted that he would like to enhance Twitter to ensure that "users" posting messages and retweeting other tweets are actual humans, not bot armies flooding the system with inputs to distort algorithms and spread propaganda. Okay, that's an admirable goal but is there resistance within the company that is so entrenched that taking the company private is the only way to accomplish that? And if the enhancement works and the 200 million daily user count is suddenly narrowed to only 45 million actual humans, what will happen to ad revenue?

So if the Twitter deal doesn't seem to make sense financially when looking only at Twitter itself, what other angles merit review?

Twitter Deal Impacts on Tesla

It's also worth looking at the impact of this deal on Tesla as a publicly traded entity. There are direct impacts between Musk's Quixotic quest to control Twitter and the financials of Tesla. If the stock price of Tesla is examined on the same key days previously discussed, one sees:

• Tesla closed at $804.58 on March 7, 2022
• Tesla closed at $1,084.59 on April 1, 2022
• Tesla closed at $1,145.45 on April 4, 2022
• Tesla closed at $985.00 on April 14, 2022
• Tesla closed at $876.42 on April 26, 2022

If those prices and the underlying valuation they imply are lined up with the events on those dates, the story becomes very concerning if you own stock in Tesla. Those data points make it clear that by publicly announcing his goal of taking Twitter private, Musk spooked existing holders of Tesla that a large number of Tesla shares might be sold on the market in a very short period of time to raise cash to buy Twitter shares at a premium. Between April 1 and April 26, Tesla stock dropped from $1084.59 to $876.42 -- a 19% drop. That drop reflects a drop in valuation from $1.12 TRILLION on April 1 to $905 BILLION on April 26, a drop of $215 BILLION dollars.

That means that Musk's personal goal of gaining control of Twitter and paying a $12.1 billion dollar premium for the privilege cost Tesla stockholders $215 BILLION dollars in lost market value -- if one attributes all of the drop in Tesla over that period to this event. But even if that impact is discounted -- heavily -- to maybe only forty to fifty percent of the root cause of the drop, that means Musk effectively destroyed $100 billion in value of Tesla shareholders for this goal that is completely unrelated to the interests of Tesla shareholders.

And that's where this deal strays into other crucial areas of consideration.

The Twitter Deal as Crystal Ball

Even a cursory analysis of impacts into other areas where Elon Musk has interests make access to a crystal ball highly desirable.

Musk has already encountered trouble with finances and tweets. On August 7, 2018, Musk tweeted he was working to obtain funds to take Tesla private. The stock was trading around $60 and Musk claimed the deal would pay around $420 per share. The market reacted with a 10% jump but the Tesla board issued a communique stating no such deal had been finalized and the stock stayed in the $40-60 range for another year. The SEC charged Musk with securities fraud on September 18, 2018 and the case wound up in a settlement where both Musk and Tesla the firm paid $20 million dollar fines ($40 million total).

[Editor note / correction 4/27/2022 -- Tesla stock underwent a 5:1 split on 8/31/2020 so the premium delta at the time of the 2018 tweet was [$420 - $340] rather than [$420 - $68], still a 24% premium over the then-current market price. Over the next year, it traded between $35.79 and $73.35 (split adjusted) or $178.95 and $366.75.]

More recently, Musk has made a public attempt to pay a fellow Twitter user to stop tweeting. The user is nineteen years old and fills a unique content niche in the twittersphere -- he uses public flight data to publish the whereabouts of Elon Musk's private jet and the whereabouts of other jets of the "point-oh-one-percenters." Musk -- with some merit -- views it as an invasion of privacy and possibly a threat to his safety. However, the teen refused to stop and refused to be "bought out" to stop.

So what will Twitter CEO Musk do with "free speech" cases like that of @ElonJet? Does Musk's support of free speech end where Musk's wallet begins? That absolutely appears to be the case based on his track record over the last decade. Bloomberg ran a story April 21 itemizing many cases in which Musk went to extraordinary efforts to silence critics or publicly smear them:

https://www.bloomberg.com/news/articles/2022-04-21/elon-musk-wants-free-speech-at-twitter-twtr-after-years-silencing-critics

While Twitter as a technology and communication platform has seemingly little to do with developing cars or space vehicles, the combination of all of these circumstances:

• Musk being the wealthiest person on the planet
• Musk owning a car-firm that seems HIGHLY overvalued and dependent upon hype
• Musk owning a space firm upon which the US government has become dependent upon for critical military launches
• Musk controlling a social media platform with 200 million daily users
• Musk having 85.7 million followers himself on that platform

seems rife with risks for exploitation and manipulation. News stories were also generated after the Twitter deal announcement questioning possible impacts in another volatile area -- crypto currencies. Musk has significant holdings of Bitcoin, Dogecoin and Ethereum. Due to the same dynamic problem affecting Tesla shareholders, many -- ahem -- "investors" in crypto currencies worried Musk might unload a significant portion of his crypto holdings, triggering a sell-off in those sectors. If one has to ask if a SINGLE person's decision to move money around from one asset to another is enough to destabilize a currency market, that's a sign questions should be asked both about the asset deal itself and the viability of the currency coming into question.

The Twitter Deal and Public Policy

So far, from this analysis, it seems difficult to justify the Twitter buyout on purely financial terms and the merits of possible non-financial motivations seem dodgy at best. Even if this deal doesn't consolidate existing competitors to raise antitrust concerns, it reflects an ENORMOUS concentration of economic power in a single individual. Should the US allow a $44 billion dollar deal to alter ownership of a communication firm with a few weeks of cursory review? The "huge" telecom merger deals of $16 billion twenty-five to thirty years ago seem quaint by comparison. Granted, those involved physical monopolies as the impacts of emerging Internet technologies had not taken root yet but on the other hand, those deals involved companies with billions in physical assets (centralized equipment and "plant" through cities and towns) and cash flows were reasonably predictable over 2-3 year horizons.

In contrast, Twitter has likely only a few hundred million dollars tied up in compute resources which depreciate rapidly scattered in ten to twenty data centers worldwide, requiring constant refreshes. Its core software product is widely adopted but uses technical capabilities which are no longer unique to Twitter and thus pose no technology moat around its continued profitability. And there's no assurance Twitter can maintain dominance in this capability. Remember MySpace?

Yet the company had a $26.3 billion valuation before merger mania kicked in for a product faced with all of these uncertainties. And the company only employees 7500 people. It's possible to look at that and conclude WOW, only 7500 people were needed to build something someone else thinks is worth $44 billion dollars. It's also possible to conclude that anything created by that small of a group likely doesn't have the type of technical or social inertia to CONTINUE operating without significant risk of disruption, either from external technical / competitive forces or internal dynamics that collapse and drive key contributors out.

In short, allowing this to go through just seems to add froth to an already frothy, overvalued market while surrendering control of a communication platform to someone with a poor record for even-handedness and honest communications about his own outsized financial interests. And that someone happens to already be the richest person in the world. Is there no other person who could try to fix what ails Twitter who seems slightly less bent on world domination?

WTH

War, Inflation, Famine and Politics

This would normally be way too much for one commentary but there's a thread through these that the press is uninterested in conveying and the public is unwilling to ponder. But ponder they must...

War

In ways which are not surprising but crass nonetheless, the war in Ukraine has been converted by the press into an Olympic style event where the top anchor talent are flown in to get some B-roll for future commercials as they nod their head hearing horror stories local reporters could have gathered with equal effectiveness but explanations of actual tactics, risks and implications to short-term and long-term policies are absent.

Social media is doing what it normally does to fill in the gaps and satisfy curiosity -- flooding the space with content ranging from the inane (the "ghost of Kyiv", a tale of a single brave Ukranian fighter pilot, part Red Baron, part Zelig -- a man everywhere and nowhere to be found -- who shot down six Russian planes in a single day) to the insane (we shouldn't be giving arms to Zellenskyy cuz the whole attempted siege of Kyiv was a feint, a ruse, I tell ya and Zellensky actually is in cahoots with Putin and will give all of our western weapons to Russia when they finally stop the charade).

There ARE individuals producing analysis of the evolving battle using public information provided by both Russia and Ukraine to highlight inconsistencies and more accurately quantify what is POSSIBLY (versus IMPOSSIBLY) happening. More importantly, they discuss the implications of those results for both Russian and Ukraine in this current conflict AND other countries pondering their own defense strategies for the future.

Possibly the two best sources of analysis I've seen to date are the Task & Purpose and Penur channels on YouTube. Laughable, right? Why should a couple of yahoos on YouTube be trusted more than billion dollar corporate networks to dissect what's happening? Task & Purpose content is created by Chris Cappy who served as an infantryman in Iraq and has focused on military technology and military life for years. His first post specifically on Ukraine was

https://www.youtube.com/watch?v=s062H1xEvuw (Ukraine's Lost Army)

on February 15, 2022 describing the history of the brewing conflict from post-USSR 1991 to the present.

The Perun channel on YouTube was originally focused on game software development but the channel owner (not sure of his real name) has an undergraduate background in military history and strategy. On March 5, 2022 he posted an initial hour long analysis of the Ukraine conflict

https://www.youtube.com/watch?v=KJkmcNjh_bg (All Bling, No Basics)

that explained the surprising results from the first week of conflict out of his frustration of seeing no one else providing similar analysis. It "exploded" views on his channel so he began producing others of similar quality with similar results.

https://www.youtube.com/watch?v=Lem3enNkbV0 (Sending Their Best)
https://www.youtube.com/watch?v=MH0xWWSJL00 (Who Is Winning?)
https://www.youtube.com/watch?v=aEpk_yGjn0E (The Price of War)

The last video (The Price of War) describes the efforts Putin is exerting to hide the damage being done to the Russian ruble by limiting purchases of dollars, limiting the ability of outsiders to trade any Russian stocks and 12% commissions on any exchange of rubles for foreign currency. These indicate the Russian economy -- bad as it may seem right now -- is likely FAR WORSE but normal indicators of health are being prevented from conveying the true level of dysfunction.

Why mention these sources and their analysis? The content on both of these sites greatly improves one's understanding of the dynamics of the war in Ukraine AND other possible battles in the future involving huge asymmetries of military power. As both of these resources point out, availability of drones (at all levels of sophistication) and relatively inexpensive tools (Javelins, NLAWs, night-vision) can level the playing field more effectively against columns of tanks or two hundred million dollar planes. With these lessons, the US should stop jumping to the conclusion that US troop involvement is the first / best alternative.

Inflation

The American media HAS been very effective at TALKING about high inflation and mapping some of the blame on "supply chain" issues and indirectly on "labor" issues constraining transportation and retail. However, most media coverage fails to spend any time describing the feedback loops involved with these challenges or additional forces that may add shocks to those areas.

Obviously, oil prices are going to be high when a primary supplier of oil and gas to Europe is engaging in a war that is triggering sanctions from nearly the entire world. That demand has to shift somewhere and when technology and drilling efficiency are constant in the near term and supply shrinks, prices will spike. The concern here is that short term efforts to soften that spike by bleeding off barrels from the strategic petroleum reserve (SPR) are likely to be COMPELTELY ineffective and misguided.

Why ineffective? The bleed-down started with a suggested 30 million barrels starting 3/1 but was recently expanded to 60 million barrels between March and June. Daily oil demand in the US is about 20 million barrels and the SPR currently houses 580 million barrels. The math says that 60 million barrels spread out over two months is one million barells per day or 5% of daily consumption. A reserve of 580 million barrels would only last twenty nine days at most. If crude itself was 100% of the cost of refined products, this would only reduce prices about five percent. A five percent blip isn't material to anyone.

Why mis-guided? Russia has a demonstrated track record of cyber attacks affecting heavy industry, energy firms and telecommunications. The chances are MUCH HIGHER than zero now that Russia will opt to launch an attack on infrastructure SOMEWHERE that would disrupt energy markets even further. Why? Answer that with another question… Given a choice, what would you prefer?

a) paying $4.50/gallon for gas
b) having NO GAS to buy at any price

With US daily demand at 20 million barrels, the SPR is already only enough capacity for twenty nine days. The 60 million barrel bleed-off reduces that by three days. To some extend, the SPR is a form of security and political theatre to begin with but shrinking the fig leaf of stability by three days clearly makes things worse in a world where probabilities for the worst-case black swan have gone up substantially.

Famine

It is possible we are currently witnessing the seeds of the MOTHER of all supply chain disruptions as Russia continues to bomb cities throughout Ukraine. Based on statistics from Germany, Ukrain supplies 11.5% of the world market for wheat and 17% of the market for corn. Russian bombing of port cities and infrastructure throughout the country has likely made it impossible to stage the seed and resources needed for one hundred percent of those crops to be planted and the labor required for planting is likely out of position either fighting Russians city by city or in refugee camps far away from home.

Based on this site at https://ihsmarkit.com/products/food-commodities-food-manufacturing-crops-wheat.html , the wheat market looks like this:

• total wheat production 764 million tonnes
• total wheat consumption 751 tonnes
• excess consumption for buffer / warehousing = 13 million tonnes
• estimated total worldwide reserves of wheat are about 281 million bushels (about 7.8 million tonnes)
• European production amounts to over 50% of the export market
• US production amounts to 20% of the export market
• Ukraine produced about 80 million tonnes of wheat in 2021
• expected 2022 production in Ukraine is about 40 million tonnes
• the countries most dependent on exports are in the middle east and Africa

So a few key points are immediately apparent. The 13 million tonne surplus in production each year doesn't cover a sudden drop of Ukraine production from 80 million to 40 million. Adding the 13 million production surplus to current worldwide reserves of 7.8 million isn't enough to cover a sudden 40 million tonne shortfall either. It isn't clear how much Russia's production will drop if they require more resources for fighting rather than working crops. Even if Russian production is unchanged, will anyone outside Russia buy their wheat?

Politics

All of the above factors further distort the politics in every country. In the US, voters seeing $100 fill-ups and $9.00/pound hamburger and egg shortages may lay it all at the feet of Biden and swing the House and Senate over to Republicans. Yet how were any of these problems triggered by Biden era decisions? Arguably,

• Trump's dissing of NATO and extortion of Ukraine likely convinced Putin no one would intervene
• Trump anti-vax insanity needlessly lengthened the post-vaccine phase of the pandemic and economic calamity
• Biden cannot reverse twenty years of curtailed investment in on-shore chip manufacturing

Worldwide, countries facing an influx of Ukrainian refugees will inevitably begin experiencing social and economic stresses related to shortages of housing, classrooms and locations for fleeing Ukrainians to work. As weeks grind into months, host countries will likely encounter resentment of the millions of extra people, driving increases in anti-immigration, nativist policies.

It doesn't bode well for democracy when the force we are fighting has poisoned our channels of public information and debate and the citizenry is already inclined to prefer authoritarian certainty over the untidy but ultimately more resilient confusion of a balanced representative society. The rich aren't going to help the world right now. The rich created these problems by funneling an obscene share of the value created to the top while starving our systems of the resources required to maintain the plumbing of the machine creating all the value. And meanwhile, the world's richest man - Elon Musk - is fixated on taking Twitter private so it can become a truly free platform… Is it because Musk wants to ensure an open platform allowing any idea or opinion to be communicated without restrictions? Or is it because Musk wants to control the company to stop a teenager from tweeting the itineraries of the private jet flights of America's oligarchs, including Elon Musk?

It's time for a new rule. When in doubt, don't surrender control of ANYTHING to people whose wealth is already 10,000x that of the average rich person. The gene pool of ideas needs new raw material.

WTH

The Horrible Calculus of Ukraine

We keep seeing stories of how resourceful Ukraine forces continue executing unexpected and surgically impactful attacks on Russian forces and capabilities. An example just posted involved one of Russia's most capable ships getting attacked and triggering abandonment of the crew after Ukraine forces first distracted the crew with drone flights on one side of the ship while a different contingent prepared a missile launch against the ship from the other direction. There are also signs that Ukraine forces took out a major petroleum plant just inside Russia that was likely key to providing fuel to Russian supply chains into Ukraine.

It seems there are two vastly different ways to interpret the current situation that are both equally plausible but both equally likely to result in huge increases in casualties.

The facts seem to be:

• the government of Russia is obviously corrupted beyond measure
• the economy of Russia is obviously corrupted beyond measure
• in hindsight, it should have been obvious the MILITARY would be equally corrupt
• in hindsight, it is impossible for a military to be corrupt but competent
• in hindsight, military spending through the other corruption weakened its worth substantially
• Russian troop were already likely incapable of delivering this "mission", whatever it was
• Russian troops certainly have zero motivation NOW to try to "win" this "mission"
• with poor military leadership, shoddy gear and no discernable military strategy identified, Russian forces are some combination of missile catchers and plundering war criminals

On one hand, those facts would SEEM to indicate Putin is incredibly weak right now. Western countries could beef up supplies to Ukraine to support dealing a few crucial direct blows to Russian forces in Ukraine or perhaps targets in Russia. With a few key blows, it might trigger internal strife between the Russian military, the oligarchs and Putin and topple Putin from power and end the killing in Ukraine.

On the other hand, Putin may be very weak right now but because of that, he is likely very unstable mentally and politically knowing his only chance of remaining alive now is remaining in power. Any escalation of supply efforts to Ukraine that levels the playing field could trigger a desperate escalation of numbers and lethality by Putin, triggering an actual inter-national war, killing hundreds of thousands or (gulp...) more.

There isn't any obvious correct strategy for solving this situation and halting this atrocity. It will be obvious a few years from now but not now. At the moment, the reality seems to be that Ukraine is stuck in a ring where it is forced to continue absorbing all of the blows from a crazed, heavyweight opponent. The rest of us look on, offering what aid we can but hoping along with Ukraine that the heavyweight will tire himself out and either wander out of the ring or expose a "tell" that allows Ukraine to land one blow that knocks Putin out with no chance to come off the canvas.

With all of the financial and military power we have, it is sickening to experience this type of powerlessness. Our leaders and the public should be contemplating this situation thoroughly and re-examining the value we get from trillions in defense spending that is incapable of being brought to bear in grossly asymmetrical situations like this.

WTH

Zellenskyy -- Even Half Will Be Enough

This is required viewing.

https://www.cbsnews.com/news/volodymyr-zelenskyy-60-minutes-2022-04-10/

The April 10, 2022 edition of 60 Minutes devoted two of the three segments to an interview with President Volodymyr Zelenskyy about his leadership of the fight against the Russian army and Zelenskyy's wishes for additional military aid.

Even through a translation, several things are apparent from listening to him.

He is the clearest speaking leader on the planet right now. There is no prevarication or hesitancy about anything he says. He doesn't blow off obvious questions that cannot or should not be answered with platitudes and old tropes. When asked if he is willing to give up territory to halt the fighting, he looks the interviewer in the eye and immediately says "Overall, we are not willing to give up our country. We have already given up a lot of lives so we need to stand firm for as long as we can but this is life.... This issue would definitely be raised in the course of negotiations, we understand the Russian side... but we were not willing to give up our territory from the beginning. Had we been willing to give up our territory, there would have been no war."

When asked what victory would look like, Zellenskyy immediately said he wants his fellow citizens to return to Ukraine. "They will come back. The return of refugees is blood to the body of Ukraine. Without them, there is nothing."

At the end of the face to face interview, Scott Pelley says he wishes Zellenskyy all the luck in the world in the fight for his country. Zellenskyy pauses for a microsecond and says "Even half will be enough."

The circumstances he faces and his communication and leadership in them make it clear he is not just a once in a generation politician or public figure. He is a once in 100-200 years figure. Ninety nine percent of the leaders and politicians on the planet right now cannot hold a candle to him. The entire world is lucky to have him in the position he is in right now. The only question is whether enough other leaders can show similar guts and identify tactics to end the fighting instead of using the war for economic fear mongering in domestic politics and further imperil Western resolve.

One side note... It seems pretty obvious that had Trump not publicly hung Zellenskyy out by slow-walking delivery of previously approved US arms to Ukraine, Putin would have not seen that cynical ploy as confirmation that the West would look away and allow him to swallow Ukraine whole. Trump's disastrous four years will haunt the entire WORLD for decades to come in ways we cannot fathom.

WTH