Twitter appears to be selling itself to entrepreneur Elon Musk for $ 43 billion, making the deal one of the biggest acquisitions in Wall Street history and giving Tesla CEO powerful control over social media. However, the calculations are unclear, as are Musk’s intentions.
These two factors make this transaction a potential disaster and will force investors, managers, users and society to think more clearly and seriously about the role of social media companies in an era distorted by viral advertising and disinformation. LBO transactions usually involve the acquisition of another company that uses a large amount of borrowed money (bonds or loans) to cover the acquisition costs.
The assets of the acquired company are often used as collateral for the loans, along with the assets of the acquired company. To make listed companies private by building up debt on them and using cash flow to pay off those obligations.
Along the way, companies that engage in publicly traded companies aim to make their goals more competitive and innovative. That’s the theory anyway, but this bargaining wave of buyouts, which began in the 1980s and peaked in 2007, has strayed.
The LBO’s transaction scene calmed down after the 2008 financial crisis, but good returns for investors and low interest rates have caused transactions to reach new heights in recent years. If Musk gets Twitter, it will inevitably become a notable case study of the impact of LBO transactions. Of course, Musk’s presence means acquisitions are not just one thing, so let’s look at the accounting of the transaction.
Musk says he promised $ 21 billion of his own money, and he was supposed to sell a large portion of Tesla shares to raise that money. Banks will lend him $ 12.5 billion, pledging an additional $ 62.5 billion of its Tesla stake. The rest of the purchase price and other costs will be financed by the $ 13 billion debt that Twitter will incur. Eventually, Twitter will have about $ 1 billion in interest payments annually.
Maybe it will be under control. Twitter’s projected cash flow (money withdrawn before interest, taxes, depreciation and amortization) is expected to be around $ 1.43 billion this year and $ 1.85 billion in 2023. Such debt payments will account for a large portion of Twitter’s cash flow.
Musk will also have about $ 1 billion in interest payments, and if Tesla shares run into problems, he could be squeezed. Twitter itself will have to turn around to make the kind of money it needs to be profitable and self-sustaining. So there will be pressure on Musk to make the finances work. It is said that he has big plans to do so. But he also said he was not interested in Twitter for economic reasons, which made potential financiers think twice. The deal “will not make much sense to most private equity investors.”
But Musk convinced Morgan Stanley, Bank of America, Barclays and other big players, in part because of what Bloomberg News called his “excited for the deal.” But it is believed that large corporations such as “Morgan Stanley” have taken precautionary measures. Or maybe you also want to stick to Musk’s good vibes so that you’ll be in a good position to make the deal flow from Tesla? We will see in time.
Investors expressed some optimism and the share price rose more than 3% on Monday, although it is still below the offer price of $ 54.20 per share. Musk has not yet provided meaningful details on exactly what he is going to do to increase Twitter’s effectiveness. He was an effective and daring leader at Tesla – but Tesla makes electric cars, it’s not a media company.
Management progress often does not match different types of businesses. Media companies have found the digital age challenging, with ads evaporating or finding new channels and subscription revenue difficult. Media companies also provide a public service. In an ideal world, responsible media companies keep users informed, monitor how power is used and how society develops, and provide forums for ideas.
Musk used social media to play games with his business interests, cheat people he disliked, and violate the law and regulators. None of this works for enlightened media management. As we also learned from Facebook and Twitter’s numerous work to monitor advertising and disinformation, social media companies need to do a better job of researching information on their platforms. Musk shows no sign that he can do the job.