Apr 16
Tragedy of the Common(stock) — Elon Musk vs. Twitter
Ooooh, boy! This is one of those, grab some popcorn situations if you are a finance geek.
There is a reason that in the realm of investment banking, Mergers and Acquisitions is considered one of the sexiest jobs out there. The board room drama, eye watering deals, backdoor politicking, lawyers bickering, investors angling, and fees and prestige for the winner and their bankers.
It’s the reason why, when I was offered an internship in investment banking at Morgan Stanley many many years ago, I requested M&A work in particular. Because as a young banker, this deal is the kind of thing you want on your resume.
All of the elements are at the table. An eccentric billionaire, an iconic media platform, two heavyweight Wall Street giants, free speech and international relations with a middle eastern Kingdom, and yes, even some crypto thrown into it. Whatever happens, this will be extremely interesting. Let’s dig in!
This deal is singularly unique in the history of M&A. Traditionally, acquisitions are either strategic or financial, hostile or friendly. For friendly and strategic, think of Time Warner and AOL merging at the nadir of the dot com boom. This is the classic, two CEOs going duck hunting on the weekend and talking about bringing their businesses together for perceived “synergies.”
Financial acquisition — the company should be torn apart, sold into pieces, and financially restructured via clever debt and equity deals. The buyer in this case is a leveraged buyout firm, has no real operational experience in the industry and likely has never used their product in their lives. But they sure know how to do finance, and come out with a profit after.
There are more permutations but you get the idea.
Elon’s bid is none of this, except for the hostile part. Elon is not doing this as a strategic acquirer — something like him buying an advanced machine shop for synergies at Tesla would be along those lines. But this is not it.
Elon is doing this acquisition bid for a cause. The Wall Street guys will cynically say that is just a bunch of baloney, but honestly I don’t think so.
Twitter is seen by him as an important open forum speech tool that is frankly moving too slowly. You can infer this from his complaints over the years on Twitter itself. This is a CEO who is used to moving fast — what other car company CEO in the world gets suggestions from customers and then is rolled out into the next Tesla update almost within a week? Rapid iteration is in the fabric of his DNA, and seeing a company as iconic as Twitter struggle to even roll out a button must be infuriating to him. The progress seems glacial.
So what happened here? I do think the original intention when he quietly acquired the equity stake was to get a board seat and try to change it from within the existing bureaucracy. I think after, he realized that the structure of decision making and political considerations were so calcified, that to move fast in the way he wanted, would be impossible.
So taking over the company entirely and wiping out the existing leadership structure, board, board subcommittees, and all that sort of stuff was necessary. This, by the way, is nothing new. Companies over the years accumulate all this bureaucratic inertia that it’s impossible to steer the ship even a millimeter without just buying the whole thing out.
Michael Dell did exactly this when he realized Dell was too slow moving in response to a changing PC landscape. So he just bought the whole company and made it private, so he could execute the fast and rapid decision making seen as necessary to turn the company around. Elon has something similar in mind. No more endless committee meetings about whether to put an edit button — just do it, it’s not rocket science (pun intended).
This is when it’s really really useful to rewatch this iconic clip from “Wall Street.”
This movie is of course legendary for any person pursuing a job in finance, and while this particular scene is famous for the “greed is good” ending, the part I really want to highlight is the middle section. This is when he excoriates the legions of “useless” VPs that get paid all these ridiculous salaries while duck hunting on the weekends. He is criticizing this largesse and bloat in an organization in front of the very shareholders who are funding their excess.
This is exactly what Elon is doing as well, except on Twitter itself! Expressing how he no longer has confidence in the existing management and he’s convinced the only way to change it is by taking it over. It’s moving too slowly, and I imagine he has ambitious goals. If he wants to implement a lot of crypto related dimensions into the platform, the speed of execution will be paramount, which is why I think crypto folks should watch what happens here carefully.
It’s very important to understand the mindset of the insiders, whether you are the current CEO, a board member, or a senior VP. For example, it’s a super cushy job being a board member! I hired a few of them in my day. You don’t have to do much, it’s prestigious, and you get paid cash and stock. The board members at Twitter, do not want to lose that, and they know if Elon takes over they will all be gone.
But at the same time, they have a fiduciary responsibility to all common stock holders — they cannot simply vote against an acquisition from Elon because they want to keep their position. This is of course, why Elon keeps railing on the fiduciary aspect…
It’s a thinly veiled threat that the board directors can be sued individually by shareholders for not acting in their interest. And he’s right.
Another interesting point here that I find fascinating. It’s possible that prima donna engineers have become the modern day equivalent of the staid VPs of the industrial era. They have enormous packages, they don’t have to go to the office anymore, they complain about kombucha and how pseudo organic the coffee beans are…everything except for making fast and rapid progress to maximize the value to shareholders. Elon has been quite frank about this type of thing, saying that their headquarters should be turned into a homeless shelter since nobody shows up for work anymore anyway.
So current engineers are understandably nervous about getting a fire lit underneath them if Elon does take over. He is known to fire entire teams that he feels don’t have a sense of urgency (he did this for Starlink, as an example).
So what is happening this weekend? A lot of stuff.
The typical defense that Goldman Sachs M&A bankers would mount is around either a fairness opinion or a deficiency in the acquisition offer itself. Fairness is mostly around: well, the fundamentals are good in the company and this corporate raider is just opportunistically swooping in at particularly bad time for the stock.
Unfortunately, Twitter is not a great business. And hilariously, Goldman’s own research division thinks so as well, which is why Elon brilliantly put this out as part of his PR onslaught:
GS’s research assesses Twitter’s value to be $30 a share, far below the $54.20 a share that is being offered.
By the way, for those wondering why this kind of mixed messaging can happen within the same investment bank…this sort of thing is common. In the dot com days, bankers would illegally pressure research to put out positive things about their corporate clients. So they erected “Chinese walls”, essentially information barriers, between the divisions so that each would independently come to their opinions.
So the board cannot really argue convincingly that Elon’s bid is grossly undervaluing the company.
GS’s M&A team will call around for White Knight alternatives. These are other companies willing to offer more per share, that current management would rather work with (and therefore likely keep their jobs). They cannot simply turn down Elon if they do not have suitable alternative offers on the table.
They will also be calling the largest institutional shareholders to try and have them pressure the board not to support the deal, while presenting them the plan for making Twitter a much more profitable business than the current stock price reflects.
Elon? He is going to call the same institutions up for his vision. This is of course hinted by this tweet:
What he is implying is that, similar to lots of other deals like this, institutions who support his buyout can also purchase into the new entity that will wholly own Twitter. For private companies there is a 500 investor limit so the average stockholder will not be part of this deal.
The pitch is simple — support the deal, get into the new entity that has a governance structure and leadership that I will dictate, give me a few years to turn this company around and maybe we can even go public years from now at a much higher price. This is exactly what Michael Dell did to Dell when he brought it private.
So institutions are faced with, I can get $54.20 today, which is a premium, a stake in the new company while it is being restructured and run by Elon, so that I can continue having upside exposure to this iconic technology company.
The investors will have to assess whether they buy into the vision of Elon turning around Twitter or not — in the same way Michael Dell had to convince investors that only he could execute a much needed turn around.
Yet another interesting twist! In addition to each side trying to rally investors to their point of view (accept Elon’s offer or not), we are seeing Elon preemptively neutralize one of the largest shareholders who is against the deal…the Saudis.
This fits nicely into Elon’s narrative about the importance of free speech, while riding on the horrific news of Jamal Khashoggi’s brutal murder for speaking out against Saudi Arabia’s leadership. Many excellent documentaries followed which showed the abuses done to silence critics.
The kingdom might decide that on balance, it would be a bad idea to have a very public battle with Elon (who is championing this deal as a boon to free speech) while drawing attention back to an episode they would rather the public forget about. Elon has a tactical advantage in this regard. Either way, Elon is not making many friends in Riyadh right now.
Finally, the stipulation of “best and final offer” and “let’s skip to the end” is also interesting. Most would be acquirers will build in some wiggle room to up their price so the board considering the bid can show they did their job and maximized value for their shareholders. While lots of commentators think this is a bluff, I personally don’t think so. I don’t think he will budge on this price at all.
This should be incredibly fascinating to watch. Personally, I think it’s 50/50 that Elon gets Twitter or another large acquirer ends up coming in at a higher price. Let’s see what happens.
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