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Investment Thesis
Inside a week of disclosing his 9.2% stake, Elon Musk made a $43 billion bid to acquire Twitter. In this article, I highlight why the uncertainty surrounding the deal’s financing rather than the offer price itself, is more likely to derail the bid. I also highlight how likely opposition from institutional investors and the potential likelihood of alternate bidders could overpower the support coming in from the retail investors.
The Bid that Took Nobody by Surprise
And so, it finally happened. Last week, Elon Musk finally “made the offer,” as the world’s richest man announced that he was seeking to buy Twitter for $43 billion. The offer, which amounts to $54.20 per share (obviously there had to be some involvement of 420) came in much sooner than I expected. I was certain that he would launch the bid on April 20th for obvious reasons, but it appears that he couldn’t wait any longer.
All the signs were leading to a takeover attempt ever since Mr. Musk disclosed his 9.2% stake in the social media platform, so this bid should not come as any surprise. While there was an initial possibility that this could become a friendly activist play from Mr. Musk after he accepted the management’s offer to join the board, that notion was quickly dismissed when inside 48 hours since he “accepted,” Mr. Musk tweeted a series of negative things about the company and the management, the importance of bringing back free speech to the platform, and the changes that he would bring to the company, before deciding against joining the board. And then came the offer. In typical Musk fashion, all of these events transpired inside a week.
Now that the bid has been made, what are the odds of Musk acquiring Twitter? In my opinion, the bid is unlikely to be successful due to three major factors, which I outline in the following sections.
Lack of Clarity Surrounding the Deal’s Financing
The biggest reason why I am of the opinion that the deal would fail is that it was made under the condition that the acquisition will only be carried out “on completion of anticipated financing.” This is very unusual, rather unheard of, for a potential acquirer to make an offer without finalising how the acquisition will be funded (all-cash, all-stock, or mixed).
What makes it even more strange is that Mr. Musk would have probably known that this potential acquisition would be anything but friendly. If the acquisition were to become hostile, which is looking ever so likely that it would be, then I am not sure how he is going to convince shareholders to sell their shares without securing the necessary funds. Given that he is cash poor despite being the richest man on the planet as most of his wealth is tied to Tesla and SpaceX shares, even if shareholders want to back his bid, the lack of clarity surrounding the deal financing is going to be a major obstacle.
Poison Pill Offsets Advantage of Rejecting Request to Join the Board
As mentioned earlier, when Mr. Musk initially accepted the company management’s invitation to join the board, it looked like a trademark activist play. Activists typically seek board representation so that they are in a position to make the necessary changes required to unlock value. But one of the pitfalls of joining the board would have been that Elon could not have acquired more than 14.9% of the company’s shares, which would have derailed any ambitions of buying Twitter. Therefore, it made sense that he rejected the request to join the board given that, as we now know, his intention was always to buy the company outright. However, that particular “advantage,” was quickly blocked by the company over the weekend when it adopted a poison pill.
Poison pill is a popular takeover defence tactic whereby if a potential hostile bidder acquires more than a certain percentage of shares, it will automatically allow all shareholders excluding the bidder to buy the shares at a steep discount. This would significantly dilute the hostile bidder’s stake.
In the case of Mr. Musk and Twitter, the threshold before the poison pill triggers is 15%, the maximum percentage of shares, which Mr. Musk would have been able to acquire had he joined the board.
Therefore, while the decision to reject joining the board was the right move, the company’s adoption of the poison pill kills any potential advantage of that move.
Alternate Bidders and Institutional Investors are Likely to Overpower the Retail Army
One of the primary factors that is expected to favour Mr. Musk is the power of the retail traders who are his ardent followers. Twitter’s stock saw massive retail inflows since the day Mr. Musk disclosed his initial stake, a sign of the sway that the billionaire has over the retail traders.
However, despite these retail inflows, institutional investors continue to dominate Twitter’s shareholding. Vanguard even overtook Mr. Musk last week and with a stake of 10.3%, is now the company’s largest shareholder. Therefore, unless there are multiple rounds of heavy retail buying, the power of the retail investors might not be strong enough to support the bid. Furthermore, even if there are significant inflows, this is only going to drive up the share price, which would most likely make the current offer price of $54.20 redundant. Institutional support, therefore, is paramount for this deal to be successful.
Moreover, it is looking increasingly likely that Mr. Musk will have to compete with alternate bidders. In the immediate aftermath of his offer, private equity giant Thoma Bravo signalled to the company that it was evaluating making a bid of its own. While this might be good news for Twitter shareholders from the perspective of potentially higher takeover premium, I don’t see how the deal would benefit Thoma Bravo since it’s not a conventional private equity target. Private equity firms generally target companies that have stable cash flows since a typical transaction generally involves huge amounts of leverage. Twitter doesn’t produce such cash flows, and therefore, the news flow surrounding Thoma Bravo should be taken with a pinch of salt. However, the idea of Twitter being subject to a bidding war is not to be taken lightly.
Offer Price is Not the Problem
Amongst the myriad of arguments that question the likelihood of Mr. Musk’s bid succeeding, the one that doesn’t make much sense to me is how the offer price of $54.20 is too low and how it falls well short of Twitter’s 52-week high of $73.34. Twitter hit these highs way back in July 2021, briefly after announcing its Q2FY21 earnings that included the company’s fastest revenue growth in seven years. We have a come a long way since then: Jack Dorsey has stepped down, the U.S. economy is under the threat of a recession, and Twitter’s own growth in the U.S. has since slowed down. Furthermore, back then, the highest analyst price target for the company was $81, today it’s $60. As such, I am not sure how one can argue about the offer price being too low.
Moreover, according to data from Refinitiv if one takes the company’s 5-year price history, the average of the stock’s daily highs stands at $38.66, which means that Musk’s offer price is at a 40% premium. If the timeline is narrowed to the last three years, the average of those daily highs stood at $45.60, which is 54 cents above the closing price on Friday. This would mean that the stock has barely moved in the last 3 years. So, the idea of the offer price being low is an argument that cannot be used to support the rejection of the deal.
Concluding Thoughts
We have got a classic Hollywood-style action on our hands when it comes to Elon Musk and Twitter. While the offer price sounds reasonable, the likelihood of this deal being successful in its current form is low given the lack of institutional support and the lack of interest shown by the board of directors. But my biggest issue with the bid is the fact that, just like the time Mr. Musk wanted to take Tesla private, there is zero clarity on how he is going to finance this deal. Even if he has “secured the funding,” the source of those funds is not clear.
Whether the deal is good or bad for the social media platform, its users, and its shareholders, unless there’s some clarity on the funding sources and unless there’s some willingness from Mr. Musk’s end to negotiate, the chances of Elon bailing on the company are much higher than him buying it. But then again, this is Elon Musk we are talking about.
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