The Resurrection of a Dying Platform - Elon Musk’s $44 Billion Twitter Takeover
On Monday April 4th, Elon Musk announced a 9.2% stake in social-media giant Twitter, briefly establishing himself as the largest shareholder in the publicly traded company. The following day, Twitter CEO Parag Agrawal released a tweet publicising Elon Musk’s election to the board of directors. This position would allow Musk to directly influence the direction of the company and oversee future product development.
A week later, on April 14th, Musk submitted an offer to buy the entire company, disclosing that he was willing to pay $54.20 per share, a 38% premium on the stock’s closing price the day prior. This valued the entire company at approximately $44 billion. After deploying a ‘poison pill defence’, the board of directors ultimately decided to accept his offer. Subject to approval of Twitter’s shareholders and the SEC, Elon Musk has transformed from a prolific Tweeter to the outright owner in no more than a few weeks. The rapidness of these developments has left some wary. Why does Musk want ownership of Twitter? What changes will he make? How can he afford it?
Why Does Musk Want Ownership of Twitter?
The sole reason fuelling Musk’s acquisition is - according to him - free speech. Elon Musk believes free speech is imperative to any functioning democracy. Previously, Twitter has been accused of ‘shadow-banning’ content when posts have misaligned with company policy. These shadow banned posts receive significantly less attention and limit the creator's ability to express themselves. Musk aims to scale back the content moderation policy.
Mr Musk has stated numerous times, most recently at a TED conference, that he does not think Twitter is living up to its potential as a "platform for free speech". Profit is not a salient outcome in this takeover, telling Chris Anderson, TED Director, “it’s not a way [for him] to make money”. Instead, he says his motivation derives from “having a public platform that is maximally trusted and broadly inclusive... this is extremely important to the future of civilisation”.
What a relief then that Musk is not doing it for the money, because if he was, he would be positively mad. Twitter is already showing worrying signs of imminent decline. The Gentleman’s Journal wrote,
“Growth is the big issue for Twitter: it’s not attracting much in the way of new users and those currently signed up aren’t engaging, Twitter has millions of inactive accounts just sitting there. There may be hundreds of millions of users using it, but Twitter is a lonely place for the average Tweeter. If you’ve got thousands of followers, it’s very different than if you’ve got just a couple of hundred. That bulk of users who aren’t cyber-celebs just aren’t getting heard or engaged with, meaning they give up and go back to Facebook or load up Instagram.” - The Gentleman's Journal
Other Twitter troubles include reports of unnecessary suspended accounts, burgeoning automated bots, online trolls, and recurrent misinformation. These problems have consequently resulted in a declining user base, with active monthly users dropping since 2018. Facing a plethora of problems, it is hard to see why anyone would want to buy Twitter. To add to his headaches, Musk must pay substantial interest to service his mammoth loans from the consortium of banks he used to fund the deal. The Washington Post explained,
“There’s also the little matter of where Musk will find the money to service all those loans he’s taken out to buy Twitter. In the typical leveraged buyout, the purchaser looks to the company he’s buying to generate the cash to cover the interest payments on the buyout loans. Musk is now on the hook for about $1.25 billion in interest payments, assuming a 5 percent interest rate on those $25 billion in bank loans to buy Twitter. But the most free cash flow that Twitter has ever generated was $868 million back in 2018, and it’s been all downhill since then. Last year, in fact, Twitter’s free cash flow was a negative $370 million.” - Washington Post
It seems that Musk will either have to restore profitability at Twitter - most likely by running more advertisements; something he has pledged not to do - or service his interest payments another way. Perhaps by selling more of his equity stake in Tesla. No wonder some of his shareholders are worried!
Musk has hinted at some changes he would like to see at Twitter, both before and after his acquisition. The viability of these alterations remains to be seen. So, when reading below, treat Musk’s proposed changes as more of a wishlist than a certainty.
Content Moderation Policy - Musk aims to scale back Twitter’s content moderation policy. During March, Musk published an online poll asking his legions of followers if they believed Twitter was protecting free speech. A resounding 70% majority - of almost two million - voted no. Elon Musk signalled that under his ownership, the company would allow all speech that the First Amendment condones. In a tweet on April 26th, Musk clarified, “By ‘free speech,’ I simply mean that which matches the law...I am against censorship that goes far beyond the law.”
Removing Spam Bots - Throughout his Twitter existence Musk has been plagued by spam bots, most noticeably ‘crypto spam bots’ . Ben Gilbert, Business Insider wrote,
“Scammers have impersonated Musk using fake accounts on various social media sites in an effort to get people to give away cryptocurrency. In 2020, Musk's account was also among high-profile Twitter accounts that were hacked to push a bitcoin scam. In January, Musk complained that Twitter was spending time on products such as profile pictures that showcase non fungible tokens (NFTs), assets verified on a blockchain, rather than fighting crypto spam bots.” - Ben Gilbert, Business Insider
Musk has made it no secret that he believes spam bats are the "single most annoying problem" with the platform, taking to Twitter numerous times to voice his opinion.
How Will He Afford It?
Musk has disclosed that he had secured $46 billion in funding before the deal closed. According to a regulatory filing, $25 billion will come from financial institutions like Morgan Stanley, Bank of America and Barclays. Musk will finance the other $21 billion by liquidating his Tesla position or whittling down his holdings in other companies.
Musk has already sold $8.5 billion worth of Tesla shares. This has resulted in the automaker’s share price tanking more than 20% since his 9.2% Twitter stake was first announced. The Tesla CEO later announced that he has no further plans to continue his liquidation of his equity stake. Musk still retains a 15% majority share in Tesla.
References/Further Reading
Wall Street Journal - Elon Musk, Twitter and Free Speech - WSJ
Washington Post - Elon Musk's Twitter deal is based on flawed math - The Washington Post
Business Insider - How Will Elon Musk Change Twitter Now That He Owns It? Here's How.
CNET - 4 Things Elon Musk Wants to Change at Twitter - CNET
The Gentleman's Journal - https://www.thegentlemansjournal.com/is-twitter-dying/