The saga of electric vehicle giant Tesla CEO Elon Musk, the world’s richest man, and microblogging site Twitter has captivated the business world for over six months now. In an unexpected U-turn on Oct 4, Musk‘s lawyers wrote to the board of Twitter, agreeing to buy the company for the original deal price of at US$54.20 ($76.13) per share, or US$44 billion in cash. It was an anti-climatic end to the much-publicised business drama.
The deal could close as early as Oct 15, as all regulatory approvals for the purchase have been granted. Musk had been trying to back out of the takeover, claiming Twitter was dishonest about how many bots, or spam accounts, used the social networking site. Twitter battled his attempt to quash the deal and accused him of reckless mischief. Both sides were due in court in Delaware on Oct 17 to hash it out. Now it’s all over.
To be sure, Musk had a pretty weak case from the start. After text messages between Musk, his friends and associates, and Twitter officials were revealed two weeks ago, it became clearer that Musk had no ground to stand on in the case. That did not stop him from seeking to bargain with Twitter’s board to accept a lower offer but he was rebuffed. In the end, Musk threw in the towel and said he would honour the original US$44 billion deal.
Why did he give up? Musk’s problem was that he was unwilling to testify or agree to be deposed before the trial. If you are the richest person on earth, you have access to more money than anyone can imagine. But, more importantly, there are also many things about you and your businesses that you don’t want anyone else to know. There is no better spectacle than the world’s richest man being grilled by a good lawyer in court. There is a reason why rich people do not want to testify in courts. They do not want to be embarrassed.
Being deposed can be an unpleasant experience and highly risky for someone as controversial as Musk. The threat of being exposed to questioning under oath in court can be problematic if you have too much to lose. Musk has been deposed before — three years ago, in the defamation case against British caver Vernon Unsworth. Musk had called Unsworth a “pedo guy” after the caver rebuffed his offer to help rescue schoolchildren trapped in a Thai cave. The Telsa CEO knows how unpleasant a deposition can be. Indeed, the stakes were even higher this time around.
Not surprisingly, the U-turn came just two days before Musk was set to start his deposition on the Twitter case. It was not just all the embarrassing texts and emails on the Twitter deal or his other businesses that would be under the microscope. Musk was aware that Twitter’s lawyers could have asked him whether he had discussions with former president Donald Trump or his associates about restoring his Twitter account or whether he had any links with the Kremlin before he began attacking Ukraine President Volodymyr Zelensky. Musk decided to pull the plug just 48 hours before his deposition was due to start and reluctantly agreeing to pay full price for Twitter.
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That brings me to the next big question: Does Musk have all the financing lined up for the US$44 billion deal? The Twitter acquisition is being financed through several buckets of cash. Musk raised US$15.5 billion cash through the sale of Tesla shares in November and December last year. He also has US$4 billion worth of existing stake in Twitter. That adds up to US$19.5 billion of his own money as equity. Another US$7 billion may come from “commitments” from venture capitalists like Marc Andreesen and wealthy friends like Larry Ellison, the founder of software giant Oracle — who may not pony up all the cash. That still leaves US$5 billion in equity that he still needs to raise.
UBS said in an Oct 5 note that Musk may need to raise another US$6 billion to 10 billion in equity because he had to pay large capital gains tax on the US$15.5 billion he raised from selling Tesla stock late last year. Musk has repeatedly said he will not sell any more Tesla stock. That means he may need to raise more cash from friends and venture capitalists who believe he can transform Twitter into an eventually profitable social media money machine.
Musk is also raising nearly US$12.5 billion in loans from banks, including Morgan Stanley, Bank of America and UK’s Barclays Bank. Of the US$12.5 billion, there are: a US$6.5 billion term loan at Libor (London Interbank Offered Rate) rate +4.75%, a US$3 billion secured bridge loan at Libor +6.75%, and another US$3 billion Libor +10%. The six-month Libor currently is 4.3%. Effectively, that means Musk is paying between 9.05% and 14.3% on his debts. That is close to US$1.5 billion in interest payments every year.
Here’s the crux. Musk is taking over Twitter at a time when its main source of revenue — advertising — is in a free fall. The two largest advertising-based platforms, Alphabet, which owns Google and YouTube, and Meta Platform, which owns Facebook, Instagram and WhatsApp, are seeing their worst ad sales slump since the 2008 global financial crisis. Moreover, Chinese short video app TikTok is siphoning away advertising from social media players.
If your business is currently unprofitable and unlikely to turn a profit over the next several years, and your main revenue, advertising, is plummeting because the global economy is slowing rapidly, you are in trouble.
Your entire business model looks shaky if you start with additional expenses of US$1.5 billion in annual interest payments. Did I mention the additional investments Twitter will need to restructure and reshape itself? A big chunk of Twitter’s software engineers are leaving because the takeover will allow them to cash out their stock options immediately. That means Musk will need to hire new people. Ask anyone in Silicon Valley — good software engineers do not come cheap these days. And if you have the reputation as a hard taskmaster that Musk has, you better be willing to pay a chunky premium to hire good people. That will only blow up costs further.
The Twitter deal is being wrapped up just a month after the leveraged buyout of software firm Citrix by Vista Equity Partners and Elliott Investment Management for $16.5 billion was completed. Banks, including Bank of America, Credit Suisse and Goldman Sachs, reportedly lost over US$700 million on that deal, which was negotiated in January, weeks before the US Federal Reserve began raising interest rates. Just last week, another group of banks pulled out of a deal to sell US$3.9 billion of debts to finance Apollo Global Management’s purchase of telecom and broadband assets from Lumen Technologies.
Morgan Stanley and others that are helping Twitter raise over US$12.5 billion in credit have to re-sell those loans to investors at a loss. These losses may not be as much as US$700 million incurred by the Citrix deal, but they are still expected to be in the hundreds of millions of dollars. Banks would need to offer interest of 15% or more just to get credit investors interested in Twitter loans.
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So, what would Musk now do with Twitter? Soon after he reversed course on the Twitter bid on Oct 4, he hinted in a tweet that he was thinking of turning the microblogging app into a “superapp” like WeChat, China’s Tencent Holdings’ one-stop shop app that facilities everything from messaging, payments, playing video games, posting videos as well as meal and grocery delivery and travel bookings. “Buying Twitter is an accelerant to creating X, the everything app,” Musk says.
In 2002, he founded X.com, a payment platform that merged with other apps to become what is now PayPal. In a townhall meeting with Twitter staffers just before he got cold feet on the Twitter deal, Musk had called WeChat “great” and said: “There’s a real opportunity to create that (outside China)... You basically live on WeChat in China because it’s so useful and so helpful to your daily life. If we could achieve that, or even close to that with Twitter, it would be an immense success.” Musk said at the time that he wanted at least a billion people using Twitter eventually, up from 237 million monetizable daily active users (mDAU) at the end of June.
Every other Internet platform on earth wants to be a superapp. There is a reason no one has succeeded. Facebook tried it with WhatsApp and Instagram, but has not gotten anywhere despite pouring a ton of money and a lot of effort. Ride-hailing firm Uber, vacation rental firm Airbnb, and payment apps Block (formerly Square) and PayPal have also toyed with the superapp idea. In Southeast Asia, Singapore’s Grab, Malaysia’s AirAsia, Indonesia’s GoTo Gojek Tokopedia are trying to imitate WeChat.
Yet what made WeChat different was a market as big as China all to itself for over a decade and a captive user base in messaging in addition to being protected within the Great Firewall of China. For a decade, Beijing looked the other way as WeChat monetized users’ data and maximised the network effects. You can’t do that anywhere else in the world. Not even in China now, because regulators are much more smarter and sensitive about data.
What’s next? For starters, Musk will allow Trump and other right-wing figures who were forced out of the platform 22 months ago to return. The new owner will be keen to maximise Twitter’s usage. Trump has said he will not return to tweeting on Twitter even if Musk allows him back in. After Twitter and Facebook booted him out, Trump started his own media firm to remain on the radar.
Trump also stands to make money from a backdoor listing of his media firm The Trump Media & Technology Group, the operator of Truth Social, the Twitter-lookalike platform. Shares of Digital World Acquisition Corp (DWAC), a blank-cheque special purpose acquisition company that merged with Trump Media, plunged to US$17.15 last week, or down 90% from their peak late last year after Musk caved in. DWAC shareholders are to vote on Oct 10 to extend the deadline for the acquisition to next year.
Will Musk eventually merge Twitter with his flagship Tesla because it’s a great free advertising and marketing platform? He has a record of pulling such stunts. In 2016, he merged his money-losing listed firm Solar City, which installs solar panels on rooftops, with Tesla through a US$2.6 billion share swap, which was described as a last-minute “bailout” of the failing firm.
Tesla owes its huge success to Musk’s ability to turn it into a story stock. If he buys Twitter and fails, the Musk “story” is at risk and that will hurt Tesla. Shares of the pioneering electric vehicle giant are down 23% over the past two weeks and down 42% from their peak last November. Musk’s net worth has fallen from around US$300 billion late last year to US$222 billion currently even as he has sold down his Tesla stake, paid capital gains taxes and ploughed money into Twitter.
For now, he remains the world’s richest person. If he can keep Twitter and his other firms —spacecraft engineering and satellite firm SpaceX, tunnel construction firm The Boring Co, and Neuralink Corp, the neurotech firm that develops implantable brain-machine interfaces — growing, he will keep the Musk story alive.
Assif Shameen is a technology and business writer based in North America