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-criticsWhile 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
