Twitter Stock: It’s A Mess Out There, And Bulls Are The Cleanup Crew (NYSE:TWTR)

Just when the sound of volatility was transforming into white noise to a tech investor’s ear, the boat was rocked with an intermission of hostility! Everyone loves a good saga; good versus evil, bad guy versus good guy, stagnant company versus…well…a guy with a lot of money. The last one is the one Twitter (NYSE:TWTR) finds itself in today’s adventures of tech investing.

The problem is the story is unfolding rather quickly and a lot of rash decisions are being made in a hurry. It’ll leave Twitter in a mess and bulls on cleanup duty if things progress the way the company’s board of directors wishes it – i.e., the get-off-our-lawn attitude. But, the board isn’t exactly in control.

The Playbook

If it isn’t clear by now, investors have two ways out of this. Number one is Elon Musk buys the company for somewhere around the mid $50s and takes the company private either directly or through other means. Bulls would exit cleanly on a premium unless, of course, they bought at the top in March or October of last year. Number two, the board enacts the poison pill they adopted a week or so ago and destroys shareholder value while Musk exits his position as investors watch the stock plummet back into the $30s – if they’re lucky.

A quick tally says the upside from $46 is about 18% to Musk’s $54.20 offer while the downside to $32 is a little over 30%.

But there’s a third option; the kicking and screaming option. This could present in two ways.

The first is the board of directors could run the poison pill playbook and attempt to ward off the takeover attempt. There’s just one problem with it: the board must actually purchase enough shares to dilute Musk’s stake.

Now, this may be doable; the board may have the cash ready at hand to start buying Twitter shares at a hefty discount. I mean, wouldn’t that be fun to increase their net worth? But I’m not convinced. So let’s run through how feasible that is.

First up to bat is Bret Taylor. He’s the independent board Chair and the Co-CEO of Salesforce (CRM). He’s estimated to be worth about $221M. However, 80% of that is tied to his stake in the company he co-runs, about $178M. So if Taylor wants to put his money where his mouth is, he will have to sell a good portion of that stock.

Salesforce shareholders, are you listening?

But, he’s only sold $31M worth over the last six years. He’ll have to pony up more than that to fend off a guy with a ~9% stake in the company he’s the Chair of. But, for the purposes of this exercise, let’s say he sells $31M of Salesforce stock tomorrow to buy half-price Twitter shares the same day, Taylor immediately owns 1.35M shares, more than his current holding of 56.6K shares. At full share price, his stake is now worth $65M. Does he want almost 30% of his net worth tied to Twitter…in a proxy battle?

If he did, that’s how the numbers likely play out. Oh, and he would have diluted Musk’s stake by effectively zero.

Taylor is number five out of eleven on the list of directors in terms of Twitter ownership today. Let’s say the entire board averages a $31M purchase at half the share price of Twitter to account for the higher net worth directors like Egon Durban ($4.5B) buying more than the lower net worth directors like Patrick Pichette ($1M). This means a collective $341M worth of shares would be purchased. At half price, that’s nearly 15M shares. This would dilute shareholders by 1.9% but only reduce Musk’s stake from 9.1% to 8.96%. Musk would have to buy $52M more worth of shares to get back to 9.1%.

Is the Twitter board prepared to spend billions of dollars of their own money to retain control? They can’t, and they won’t. They are at odds, and it’s because they were never aligned with the company’s interest through their stake. It’s too late to fight for control.

The board’s only viable option is for an outside entity it trusts to compete with Musk’s stake. After all, the poison pill states when an unauthorized stakeholder exceeds 15%, it can start the process. It could work with a proxy to, at minimum, buy shares at a discount to fend off Musk and increase that proxy’s stake to a level where Musk can’t get to 51%. But who’s going to invest that much in Twitter in a short amount of time and then watch its premium disappear as it both dilutes the entire company and the air comes out of the Musk parade. Sure, it might still be above a theoretical $23 per share when it’s all said and done, but that proxy is going to want to get out also at some point.

For shareholders, this is the worst of the worst outcome. Twitter will effectively run itself into the ground at that point.

The Realistic End Result

Musk’s net worth is $264.6B. So technically, he could buy Twitter seven times over if he sold Tesla (TSLA), SpaceX, and whatever else he has ownership in for the liquid assets. But, as of Thursday morning, he has the financing secured (for real this time) to make a tender offer worth $46.5B for the entire company, which values each share closer to $58. That’s 26% upside, not 18%. No poison pill will stop that as long as shareholders accept the offer.

I haven’t even gotten into the fiduciary duty aspect of the board’s responsibilities, either.

But, overall, the downside is somewhat steep if Musk fails at acquiring the company in this hostile takeover scenario – it would be back to the $30s quickly. I’d give a go at put options if the odds of it failing were high enough. But Elon Musk being Elon Musk isn’t one to back down from a fight. Being the richest man in the world combined with Twitter being a misaligned and relatively small company in social media terms (the smallest of Snap (SNAP) and Meta Platforms (FB)), doesn’t it make it too challenging to buy regardless of what the board wants.

All in all, it’s going to get messy. But the bulls could be the ones on top when it’s all said and done. With a $58 offer potentially on the table, the upside of 26% nearly matches the downside of 30%. The problem is they’ll be the ones cleaning up the mess and licking their wounds if this craters. The risk/reward from here is relatively even unless one is convinced Musk has this in the bag. If I were long, I’d trim a good portion of my holdings here to reduce risk but carry some to enjoy a $58 per share payout in the not-so-distant future.