By Adil Amlaiky and Anish Umasuthan (McGill University), Ayushman Mukherjee, Junseok Choi, Matthew Liu and Divy Dayal (University of Cambridge)
Photo: Alexander Shatov (Unsplash)
Overview of the deal
Acquirer: Elon Musk
Implied Equity Value: $44bn
Total Transaction Size: $46.5bn
Closed date: 27/10/2022
Acquirer advisors: Morgan Stanley, BofA Securities, Inc., Barclays Plc.
Target advisors: Goldman Sachs & Co. LLC, J.P. Morgan & Chase Co., Allen & Co.
On 27/10/2022, Elon Musk announced the closing of his $44bn acquisition of Twitter (NYSE: TWTR), eventually drawing an end to the 6-month long journey that has had many ups and downs throughout. The SpaceX and Tesla CEO has taken Twitter private at its initially agreed price of $54.20 per share. The transaction involved $31bn of equity commitment from Musk, including his original 9.6% stake in Twitter, investments from Oracle Corp’s co-founders Larry Ellision and Alwaleed bin Talal and others. The remaining $13bn was sourced through debt financing from Morgan Stanley, BofA Securities and Barclays etc. The three aforementioned institutions acted as financial advisors to Elon Musk with Goldman Sachs, J.P. Morgan and Allen & Co as the target’s counterparts. Whilst still subject to controversies, Musk is planning to implement several key transformations to the American social media giant to combat spam accounts, promote freedom of speech, as well as to take another step towards the creation of the so-called “Everything App”.
The $44bn transaction has inarguably been a blockbuster amidst a global downturn in the M&A market with several dramas over the course of the deal. On 25/04/2022, Twitter’s board entered into a unanimous agreement with Musk with his initial buyout offer, which saw a rather unexpected reversal in July when Musk attempted to withdraw from the deal citing the target’s breach of agreement regarding investigations into the social media’s fake accounts, resulting in Twitter’s pursuit of filing a lawsuit against the acquirer at the Delaware Court of Chancery. Subsequently in October, Musk took a U-turn to enter back into the agreement ahead of the scheduled trial on 17/10/2022 with the much-awaited deal closing announcement on 27/10/2022. This, however, was not an end to the 6-month long rollercoaster ride as Musk followed on with taking drastic actions to cut down half of Twitter’s 7,500 workforce including key executives like CEO Parag Agarwal, CFO Ned Segal and policy chief Vijay Gadde, causing widespread controversies amongst the public. Added to this, the lenders recently announced to hold the debts in book until 2023 when they are anticipating Twitter to reveal clearer plans of business development and fiscal projections. This is also partially due to the unfavourable market conditions which has made it harder for the banks to persuade potential investors. Nevertheless, the course of reformative actions to be taken by Musk’s Twitter will certainly be an interesting watch to many around the world.
Elon Musk - Profile
Elon Musk is a South African-born American entrepreneur and businessman. He is widely recognised online for his satire on Twitter which has over 100 million followers. Becoming Forbes’s richest person in the world, his journey’s major starting point began by co-founding the electronic payment company PayPal. Later he would sell PayPal and form SpaceX, and then become the CEO of the electric car manufacturer Tesla. He has just newly become the owner and CEO of Twitter following the acquisition.
Born: June 28, 1971
CEO & Chief Engineer of SpaceX
CEO of Tesla
CEO of Twitter
President of Musk Foundation
Organisations Founded: PayPal, Zip2, X.com, The Boring Company, Neuralink, Tesla, SpaceX, Open AI, Musk Foundation Net Worth: $190bn (Richest Man on Forbes)
Education: University of Pennsylvania
Company Details (Target - Twitter)
Founded in 2006 by Jack Dorsey, Noah Glass, Biz Stone and Evan Williams, Twitter is an American communications company that pioneered “micro-blogging.” With 25 offices around the world, 100 million users and 340 million tweets a day, it is the “SMS of the internet.” What started as a university side-project became the mega social network it is today, fact-checking the president’s claims to partnerships, such as with e-commerce giant Shopify. Twitter’s primary objective is to “connect users and share thoughts,” and does so via character-limited posts called “tweets.”
Founded in 2006, headquartered in San Francisco, California
Founder: Jack Dorsey
CEO: Parag Agarwal
Number of employees: 7,500
Market Cap: $41.1bn
2022 Annualised Recurring Revenue: $5.08bn
LTM EV/Revenue: 8.0x
LTM EV/EBITDA: 71.0x
2021 EV/EBITDA: 39.0x
Projections and Assumptions
The effects of the acquisition on Twitter’s EBITDA margins remain ambiguous – but there are three factors to consider. The first is headcount. The firm has already laid off 3,700 people – almost half of its staff – over the past two weeks. Whilst the measure was purportedly to cut costs – as Twitter had previously been on track to lose $700 million in 2023 - golden parachutes for Twitter’s top 3 executives already amount to $122 million, with all others affected receiving at least three months of severance pay. Whether or not these packages are realised, the firm is likely to battle costly litigation. Litigation has not just been creeping in from the top: Twitter has already been sued in the state of California for violating worker protection laws, with unions in the UK and Ireland (Prospect and the Irish Congress of Trade Unions) appearing to follow suit. Even if the firm manages to emerge unscathed, the reputational costs will be significant. Indeed, Bloomberg reports that Twitter has already begun attempting to rehire some of those laid off – a charade that will significantly impair Twitter’s ability to attract top talent.
The value of reputation will be felt most dearly in Twitter’s advertising – which accounts for 90% of the firm’s revenue. Musk has admitted that the firm has faced a “massive drop in revenue, due to activist groups pressuring advertisers” – with firms including General Motors, Pfizer, Mondelez, United, Audi, and Carlsberg all suspending Twitter ads last week. This fall in revenue is particularly perilous in the context of Twitter’s heavy debt burden. Twitter faces interest payments of close to $1.2 billion in the next 12 months on the debt used to finance the acquisition. These payments already exceed Twitter’s most recently disclosed cash flow of $1.1 billion at the end of June. Moody’s, a credit rating agency, has already cut Twitter two notches to B1 – or four steps into junk territory – because of a substantial increase in debt and a reduction of cash.
Musk has already outlined some of his plans to buoy cash flows. He has directed Twitter to find $1 billion in annual infrastructure cost savings. This is certainly ambitious – and represents 17.8% of Twitter’s costs in 2021. However, it comes at the potential risk of the app going down during moments of high traffic. Musk has also outlined plans for a new $8 monthly subscription service that will include the verification of Twitter users’ authenticity and in-app digital payment infrastructure. Whilst Musk may have already done this once before with PayPal – ambitions to turn Twitter into an “everything app” must be taken with a grain of salt.
Long-term Consequences and Upsides
The short term layoffs will translate to lost features, and eventually users in the long term. Moreover, lawsuits from employees who were terminated in an environment contrary to the laws that govern their contract, could accumulate and have a long term negative impact on Twitter.
Being considered a virtual town square, where several matters are discussed, the Twitter platform could lose to Musk’s subscription based view on commercial as well as government accounts. Given that Musk’s approach to transitioning the platform into one that promotes greater free speech, the execution of his approach will be important to determine whether governments, commercial businesses, and NGOs would pay for such a platform. In other words, the business model would change from an advertising based revenue model to a subscription based revenue model. However, Elon is confident that by making Twitter more transparent, which would occur by having users input their real names, the subscription model would be successful. Those that insult and threaten could be pursued, due to transparency of their identity.
The uncertainty set by possible change is further countered with the chance that Elon’s knack for innovation, completely repurposes the platform to the point of improvement. Musk mentioned making the platform “better than ever” with new features, open source algorithms, and a method that would defeat spam bots. In fact, an ambitious comment was made by Musk regarding the possibility of creating an app reminiscent of the WeChat app by Tencent; “an everything app” that would be called X. The initiative would result in a forecast of 931 million users in 2028, which translates to $26.4 billion in revenue. In that regard, the aggressive pressure on cost reduction would accompany such a plan.
The deal is also set to change the way in which Twitter employees work, with a minimum of 40 hours per week being mandated. Musk established a ban on remote work, to prepare for his objective of creating an impressive all-encompassing app.
Risks and Uncertainties
Given the debt that was strapped onto the company through Musk’s leveraged buyout, which is one of the largest in history, the increasing interest expense could lead to bankruptcy if Twitter misses a payment. One could say that the firm is going through an operational restructuring phase, which could have dire consequences, should employees be less productive on Musk’s terms.
Moreover, the business model switch could backfire. The number of verified users in 2022 is 424,000, which if charged $8/month, would only generate $41 million in additional annual revenue for Twitter. The revenue generated in a year on this subscription model is less than 5% of the interest expense owed.
“It is an easy management mistake to conclude that employees working from home are less productive or collaborative than those in the office . . . [but] remote workers work more, not less.” - Bruce Daislye, Former European Vice President