Doubting Elon Musk has been an expensive experience. So, why should we be so quick to query the world’s richest man attempting a $44 billion leveraged buy-out (LBO) of Twitter? The commentariat has been quick to colour the story with free speech rights, editorial muscle and entrepreneurial ego but I wonder whether we need to ‘de-Twitter’ this story. Those of only a passing acquaintance with the Twitter-sphere might actually, in this instance, be in a better place to see a picture with very different colours. Also, there are some interesting angles in the proposed deal for business owners and start-up founders. Lets start with the financials of this LBO.
First off, this is potentially one of the top 10 LBO deals in history and is the biggest since Michael Dell and private equity house, Silver Lake, engineered the $67 billion acquisition of data infrastructure giant EMC in 2016. The unusual feature of the Twitter deal is that there are no traditional private equity beasts involved aka the fabled Barbarians at the Gate. It’s just Musk and $19 billion of his own cash(!) plus $25 billion of “other people’s money” in margin loans and debt financing from a Wall Street bank syndicate. The collateral will be Tesla shares owned by Musk but check out the interest rates on the loans in a world where the cost of capital(and inflation) is rising. Reports suggest an interest rate on these loans could be in the region of 5.5% which would consume about $1.3-1.4 billion of cash. To put that in Twitter context that’s 30% of its revenues and almost two thirds of annual cash flow(EBITDA). The operational wiggle room for this business and other debt-laden businesses is shrinking, and therefore carries more risk. And, that has consequences.
The cost of capital risk trade-off is in the valuation of the acquisition. Take note owners looking at acquisitions or founders raising funds or negotiating exits in 2022. Musk is paying a 38% premium to the Twitter share price on the day prior to his announcing the taking of a 9% stake. However, it’s just a 16% premium to the Twitter share price in the calmer days of early 2022 and 30% off the all- time-high share price of $77. Please recall the Twitter board initially rebuffed Elon’s offer and then giggle at the Bubblevision maestro, Jim Cramer, telling his CNBC audience that the Twitter board had “no choice” but to reject the offer. Clearly, the board’s advisors and bankers had a subsequent awkward conversation about 2022 valuation realities. So, that’s the financial engineering covered but one suspects these are not the numbers which motivate Musk.
Musk wants to make money. The Twitter platform has 220 million monetizable daily active users but its $5 billion of revenues can’t even match those generated by a single video game, Call of Duty: Black Ops Cold War, in 2021. Arguably, the advertising business model has failed Twitter. However, Elon Musk has famously never spent a single dollar on advertising Tesla or SpaceX. You may not agree with his social media messaging but Tesla is a remarkably well told story of consumer product and manufacturing excellence. Think about that for a second – a consumer product manufacturer which has never advertised but is selling a million cars a year and has achieved a $1 trillion valuation. Musk has joined Steve Jobs as the greatest consumer product storyteller in history and he knows Twitter has told its story incredibly badly. Musk will tell a far better story and the following might feature….
- Twitter is simply the best real time information search engine on the planet.
- Twitter is two businesses – a digital network and data analytics engine.
- Twitter is a “sit forward” experience – breaking news, sport, geopolitical events, weather catastrophe, information, education etc.
- Twitter is NOT a “sit back” experience – leisure, shopping, aspirational, dreams, travel etc
- Twitter is NOT a natural home for aspirational advertising.
- Twitter with its 200 million users(nodes) has a potential role in a decentralized digital world, the metaverse.
- Twitter is the first platform to let people get payouts in cryptocurrencies using Stripe’s Connect facility.
- Twitter with its millions of nodes/users has huge validation utility in the areas of KYC, digital currencies, NFTs and tokenomics.
The list above conveniently skips over the fact that Twitter like much of social media is facing increased scrutiny as badly governed platforms for hate speech, disinformation and political extremism. On Twitter alone just 6% of its users generate 75% of its political content. However, the fears that Musk is going to let Trump, anti-vaxxers, Nadine Dorries and the lunatic fringe destroy the Twitter brand and drive mainstream users to other platforms seems naive. The solution and the clue is in the KYC/validation opportunity in point 8 above. Musk’s engineering skills and ambition should not be underestimated in making Twitter a safer place. But, but, but…. he’ll be a billionaire media owner and that can’t be good for free speech says nearly everyone. Hmmmm….
Amazon’s Jeff Bezos is already querying Musk as a media owner but he’s the second richest man on the planet and he owns the influential Washington Post. Musk as the richest will own Twitter. The third richest guy owns Facebook. The 5th and 6th ranked billionaire boys(!) started Google and the 4th and 9th guys started Microsoft. Oh, and the 10th fella owns Bloomberg(hat tip to David Rothkopf at The Daily Beast). What ya think ladies? Actually, Marina Hyde in the Guardian today put these fears into perspective quite amusingly….
“People who seem to spend half their lives complaining about Twitter, on Twitter, seem stunned by the idea that a shitposter would ultimately buy it. Catch up! It doesn’t feel like a complete coincidence that all social media platforms are owned by men you’d run a mile from, socially.”
On a more substantive note, and in keeping with the ESG/sustainability hypocrisy flashing across Europe this week Jeff Bezos suggested China could have “leverage” over Musk and Twitter. Indeed, China now accounts for almost 25% of Tesla’s annual revenues, is home to a large Tesla manufacturing facility as well as being a major supplier of key EV battery components. Given Twitter accounts for barely 5% of the value of Tesla, the leverage point is valid. However, the craven behaviour of many consumer brands, sporting organisations and even sovereign governments in keeping Beijing happy indicates ESG hypocrisy is not exclusive to the gas guzzling Europeans funding Russian mass murder in Ukraine. China remains a global challenge with or without Twitter influence or leverage.
Ultimately, the Twitter deal is a judgment and a call on the future. Two of the better books I have been reading recently are fascinating insights into how fast the future and technology is moving(The Future is Faster Than You Think – Diamandis, Kotler) and how humans are so susceptible to noise and bias in decision-making(Noise – Kahneman, Sibony, Sunstein). We can’t forecast the future but Musk’s track record is impressive and I can’t help thinking about his first entrepreneurial success, PayPal.
In many ways, Musk has already maximized his wealth opportunity in manufacturing the future(EVs and Rockets/Satellites) with Tesla and SpaceX. So, Twitter might be part of a de-risking or diversification strategy which puts him at the confluence of technologies delivering next generation PayPal services. I’m thinking of Twitter as a launch mechanism for blockchain, digital currencies, digital ID/verification, meta-commerce, neobanking, decentralized finance(DeFi), tokenomics etc.
Not much media in that list. So, it’s quite possible the hyperventilation in this week’s media is more noise than knowledge. And… be in no doubt, Elon Musk will tell a much better story.