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The Twitter/Elon Musk Saga - "the bird is freed"

Details of the transaction: a masterclass in M&A - or not :/

On October 27th, Elon Musk closed his deal to acquire Twitter in proceedings which began on April 14th 2022, when he offered to buy the company for $54.20 a share – amounting to a $44 billion mega deal. Initially, Twitter’s Board unanimously agreed to a ‘limited duration shareholder rights plan’ otherwise known as a ‘poison pill’ approach, used to deter hostile takeovers.

This involved allowing shareholders to purchase shares at a discount if a new/existing investor were to acquire at least 15% of Twitter’s outstanding common stock without board approval.

In effect, this temporarily dilutes the ownership stake available for the potential buyer – affording the Board and shareholders a greater degree of deliberation and negotiation before making a decision. On April 25th, Twitter’s Board unanimously accepted Musk’s takeover offer.

The deal represents a public-to-private takeover, in which Twitter’s shares are to be suspended from trading and the company is to be delisted from the New York Stock Exchange on November 8th. The company is being made private via a merger with X Holdings – a private company set up and controlled by Musk in Delaware as a vehicle for the transaction.

Financing of the deal involves a $46.5bn combination of equity and debt to fund the $44bn price tag and the closing costs associated with the deal. This includes a $13bn loan from banks such as Morgan Stanley, Bank of America Corp, and Barclays as well as £33.5bn in equity commitments including Musk’s 9.6% stake in Twitter (worth $4bn) and a further $7.1bn from equity investors such as Binance, Fidelity, and Oracle co-founder Larry Ellison.

It is not 100% clear how Musk is to satisfy the remaining $22.4bn in equity financing, though it is speculated that about $20bn may be covered by Musk’s own cash – the value of selling parts of his stake in Tesla in the past year.

Months of delay in the proceedings of the acquisition can be attributed to Musk’s decision to sue Twitter months after the takeover agreement in an attempt to terminate the deal. He alleged that Twitter was in ‘material breach’ of terms in the merger agreement by failing to comply with his requests for data on Twitter’s spambot numbers.

Twitter responded with a countersuit in attempt to force Musk to close the acquisition. Weeks before the standoff trial, Musk announced he was willing to buy the company at the originally agreed price (after offering lower prices on two prior occasions during the delay) on the condition that Twitter would drop the lawsuit.

This shift in legal stance was due to Musk’s lawyer’s being unable to argue a ‘material adverse change’, i.e. a significant reduction in the value of Twitter which was originally bargained for, to terminate the merger agreement. Consequently, the Delaware court ordered that the parties close the deal by October 28 or face a trial in November (the former being realised).

Consequences of the deal - will the bird fly?

As previously mentioned, this takeover is a public-to-private deal. As a private company, Twitter will no longer be required to make quarterly public disclosures about their performance (as required by stock exchanges), and thus experience volatility in share value. Private companies are also subject to less regulatory scrutiny and provide owners with a greater degree of control over the company as ownership is not open to and thus diluted by public shareholders.

A significant issue is Twitter’s commercial future. Twitter makes about $5bn in annual revenue (and has been operating at a loss every year since its listing in 2013, bar 2018 and 2019), almost 90% of which is derived from advertising. Musk’s plans for Twitter, including changes to content moderation and emphasis on a platform for ‘free speech’ has alarmed Twitter users and advertisers alike.

High profile companies have since halted advertising on Twitter following the takeover, resulting in a ‘massive drop in revenue’ (see Musk’s tweet). Some examples include Carlsberg, Volkswagen, and General Motors. Interpublic, one of the world’s largest advertising groups, has recommended its clients suspend advertising spending on Twitter temporarily to monitor developments in content moderation policies.

Revenue enhancements and cost-cutting plays an important role in realising ‘synergies’ from a merger/acquisition. Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. Musk is attempting to enhance Twitter's revenue by monetising blue-tick verified accounts through a monthly subscription of $8 – but this is only estimated to generate around $40m per month.

As revenue has drastically dropped post-acquisition, cost-cutting is likely to play a much more significant role in keeping Twitter financially afloat. This is particularly concerning considering Twitter’s debt obligations as a result of the deal. The cost of repaying loans may run as high as $1bn a year in interest.

Already, mass layoffs have begun. Twitter had about 7,500 employees across the globe prior to the takeover, and has already lost almost half the workforce in order to reduce Twitter’s daily losses of $4m. A class action lawsuit in the US has been filed in response to the layoffs, arguing that Twitter has not adhered to the Worker Adjustment and Retraining Notification Act which requires employers to provide 60 days’ notice of a “mass lay-off” to affected employees.

The future of Twitter is uncertain. The bird has been freed – but will it fly?


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