Oh Elon
Well! That was stupid.
To recap. In April of this year, Elon Musk announced that he had bought about 9.2% of the stock of Twitter Inc. He agreed to join Twitter’s board of directors, and then changed his mind. He offered to take Twitter private at $54.20 per share and then, to my considerable surprise, actually went out and lined up $46 billion of financing to do it. Twitter’s board of directors consulted its financial advisers, who stage-whispered “SAY YES,” and it said yes. On April 25, three weeks after Musk’s first announcement, he signed a merger agreement to buy Twitter for $54.20 in cash.
Less than three weeks after that, Musk changed his mind. I don’t know what happened, really, but three leading explanations are:
He wanted to buy Twitter in April, but now it was May, and he had moved on to other japes and frolics.
The stock market had fallen, the market for social-media stocks had fallen even further, and the price of Tesla Inc. stock, which Musk was relying on to pay for Twitter, was also way down. Twitter looked like a bad deal at $54.20, and Musk would have to stretch a bit to pay for it, so he decided he didn’t want it.
Musk himself had a story about how Twitter tricked him into buying the company by lying about how many spam bots were on its platform. This story never made even the teeniest bit of sense, we have talked about it endlessly, and now we never have to again. Bye spam bots!
So Musk canceled the deal, Twitter sued, and the case was set for trial this month. Now it is … maybe … not? Bloomberg News reported yesterday:
Elon Musk revived a bid to buy for Twitter Inc. at the original price of $54.20 a share, backtracking on his effort to quit the deal and potentially avoiding a contentious courtroom fight.
Musk made the proposal in a letter to Twitter on Monday, according to a filing with the Securities and Exchange Commission that confirmed a Bloomberg report. Shares of Twitter climbed 22% to $52 at the close in New York. San Francisco-based Twitter said it received the letter and intends to close the deal at the agreed-upon price, without commenting specifically on how it will respond to Musk.
Never mind! We’re back to where we were in April. Which is still a very weird place? The world’s richest person decided that Twitter is the “town square,” humanity’s main forum for public communication, so he’s going to buy it for himself. “Elon Musk is buying Twitter” was a jarring headline the first time, six months ago. Now it is a relief.
Here is Musk’s letter. Here is Twitter’s tweeted statement. Musk’s letter says that he intends to close the deal on its original terms, “pending receipt of the proceeds of the debt financing contemplated thereby, provided that the Delaware Chancery Court enter an immediate stay of the action … and adjourn the trial and all other proceedings related thereto pending such closing or further order of the Court.”
Just reading those words, two obvious avenues for shenanigans will occur to you. The first is that they could all go to court, and Musk could say “it’s okay, we’re closing soon, everything’s fine, just need to adjourn the trial,” and Twitter could say “yep, everything’s great, Musk’s word is good enough for us, we’ve never had any reason to doubt him,” and the judge could say “okay great, nice meeting you all, now I am going to leave immediately on a six-month vacation with no internet reception,” and then they could walk out of court and Musk could say “lol psych” and terminate the deal again. This would be exceptionally funny, but I do not think it is very likely. I think that Twitter’s lawyers, and the judge, will probably keep an eye on Musk until his check clears, and Musk and his lawyers know that, and trying to trick Twitter into dropping its lawsuit obviously wouldn’t work.[1]
The other issue is that Musk’s offer to close is “pending the receipt of” $13 billion of debt financing from his banks, led by Morgan Stanley. Again there are funny possibilities here. Maybe everyone will show up at the closing and Morgan Stanley will walk in and say “hey guys you’re not going to believe this but we have reason to think that more than 5% of Twitter’s users are spam bots, which would create a material adverse effect on the company, so we can’t close the financing, deal’s off.”[2] That would be the funniest possible outcome, much funnier than Musk just changing his mind again. Musk is a business prankster and his antics are getting old, but for a serious Morgan Stanley banker to show up and do the bot routine, with a straight face, would be incredible.
All of this seems unlikely, though, and I assume that the deal will close. The stock closed at $52.00 yesterday, very close to the $54.20 deal price and up 22% from Monday’s close of $42.54. Several reports suggest that the deal might close “within a matter of days” or “as soon as next week.” Last night Musk tweeted that “Buying Twitter is an accelerant to creating X, the everything app,” which sounds exhausting. The app will do everything, but it will start with two functions: You can read tweets, or you can be shot on a rocket into space. Choose wisely.
Why? Why would you spend this much time and money trying to get out of the deal, and be this annoying about it, and then just unconditionally surrender two weeks before trial? One possibility is that it became increasingly obvious to Musk that he was going to lose the trial, and that didn’t seem fun, so he seized the initiative (?) by surrendering instead.[3] If this did go to trial he’d have to testify (and be deposed this week), his text messages with his friends have become public and more might come out, and the whole thing would be more distracting, unpleasant and embarrassing than he really wanted.
Similarly, Jessica Lessin’s theory is that Musk “has bigger challenges to contend with elsewhere. Spending hours and hours preparing for a trial everyone thought he was going to lose didn’t rank high on the list.” Musk’s efforts not to buy Twitter were becoming too distracting, so he decided to become the owner (and interim chief executive officer!?) of Twitter instead to minimize distraction. That seems right. Sure, running Twitter will be distracting and time-consuming, but in a fun way. Trying to get out of running Twitter was probably fun initially, but now it has become a drag.
This lawsuit was always going to be tough to settle. You could imagine some other set of facts where you might look at it and say “yes there’s a 50% chance that a judge will order Musk to close the deal at $54.20 per share, and a 50% chance that she won’t and Twitter will get nothing and end up worth $20 per share or less.” And Musk and Twitter could both see that, and they’d want to minimize risk, so Musk would say “look fine $40 per share” and Twitter would say “yeah that’s fine” and they’d compromise.
But in the real world Musk’s arguments for getting out of the deal were really bad, like, not-even-trying levels of bad. “Does Elon Musk Know How Mergers Work?” was a headline I wrote last month. He had good lawyers and life is uncertain, but the odds were against him. If you figured Twitter had a 95% chance of winning, then maybe it would have made sense to settle for a repriced deal at, you know, $52 or $53 or whatever. But what would that have accomplished? It would barely save Musk any money, or any embarrassment, and he’d still have to own Twitter. And it would be a mess for Twitter: “You were clearly going to win in court, and you gave away billions of dollars of shareholder money just to avoid Elon Musk saying mean things about you,” shareholders would say, when they sued Twitter’s directors personally for violating their fiduciary duties. Also, Twitter has already put the original deal to a shareholder vote, and shareholders overwhelmingly (98.6%) approved it; a revised deal would require a new shareholder vote, a new proxy statement, new disclosures, new delays, new risks.[4]
So while it was reasonable to interpret Musk’s actions as being an attempt to renegotiate the deal at a lower price, that never really went anywhere. There was no lower price to be had. You can see why he tried; as, like, a poker move, it made sense. Maybe Twitter would get scared and concede something. Maybe Musk’s bot-fishing expedition would turn up some evidence so that he could get out of (or reprice) the deal. Maybe by some random coincidence someone else would discover that Twitter was running a gigantic fraud, completely unrelated to Musk’s bot stuff, and that fraud would be enough to get Musk out of the deal. (That arguably almost happened?) Injecting some chaos into this deal increased the chances of getting Musk out of it, or at least getting him a lower price. It just didn’t work. It was a fine gamble, it failed, and Musk, sensibly, moved on.
Now, in the real world, there was an obvious risk to Musk’s strategy of creating chaos and talking trash about Twitter — saying that most of its users are fake, that it is a long-running fraud on advertisers, that there was a “broader conspiracy among Twitter executives to deceive the public, its investors, and the government about the dysfunction at the heart of the company” — to try to get out of the deal. The risk was that he would do a good enough job of talking trash about Twitter to damage the company, but not good enough to get out of the deal. If Musk went out and caused a material adverse effect on Twitter, or a not-quite-material-adverse-effect-but-still-pretty-bad, he’d be stuck buying it, but he’d regret it even more.
I guess that sort of happened? The Wall Street Journal notes:
Twitter is now arguably in worse shape than it was when Mr. Musk said he was walking away, buffeted by a deteriorating outlook for digital advertising, the emergence of its former security chief as a whistleblower who claimed a range of failures by its management, and uncertainty over the company’s future stoked by Mr. Musk himself.
I don’t want to overstate this. Musk’s main approach here was to argue that Twitter’s users are all fake and it deceives advertisers by undercounting bot accounts. You could imagine that argument doing real damage to Twitter’s business, if advertisers looked at his evidence and believed him and stopped buying ads. This never happened because the bot stuff was transparent nonsense, so that’s good I guess, for him, now that he’s buying Twitter again. On the other hand there is, you know, the rest of it. That whistleblower testified before Congress, and got way more attention than he would have without Musk’s involvement. Twitter’s employees are demoralized by months of fighting to be acquired by a guy who hates them; how many of them will stick around?
And then there is the financing. Musk’s banks, led by Morgan Stanley, have committed to lend Twitter $13 billon to help pay the purchase price. They made that commitment — and fixed the terms of that debt — in April, when social-media stocks were higher, Musk was richer, credit spreads were tighter, interest rates were lower, and Musk was saying nice things about Twitter instead of calling it a massive fraud. Now it is October and that commitment looks awful. Bloomberg reports:
If terms of the original $12.5 billion financing package[5] remain the same, bankers may struggle to sell the risky Twitter buyout debt just as credit markets begin to crack. With yields at multiyear highs, they’re potentially on the hook for hundreds of millions of dollars of losses on the unsecured portion alone should they try to unload it to investors. That’s because they would almost certainly have to offer the debt at a steep discount.
And:
“It’s similar to a vegetarian going to a steakhouse: Very limited appetite,” said John McClain, a high-yield portfolio manager at Brandywine Global Investment Management, referring to investor demand for buyout debt. “Given the incremental company specific news flow since the deal was agreed to -- combined with the meaningful deterioration in the economy -- lenders will be very hesitant to provide financing.”
For comparison, the private equity buyout of Citrix Systems Inc. was signed in January, and last month banks sold most of the $15 billion of debt for the deal at prices of 83.5 to 91 cents on the dollar. Similar levels here would leave Musk’s banks with more than a billion dollars of losses.
Ordinarily when banks provide debt financing for a leveraged buyout, there is an orderly process for marketing the debt. Between signing and closing of the deal everyone — the banks, the target, the buyer — gets together and writes disclosure and marketing documents for the debt. The buyer and the target have a business plan and financial projections that they can pitch to potential investors, and they have meetings with those investors to drum up enthusiasm. And then the debt is sold before the deal closes, so that the banks have the money (from selling the debt) to give to the buyer to pay the purchase price at closing.
You can read Musk’s debt commitment letter for the deal here. On pages 3 and 4 there is a section titled “Syndication” that says that the banks “intend to commence syndication efforts promptly” and sell the debt “prior to the Closing Date,” and that requires Musk to do things like “ensure that any syndication efforts benefit materially from your existing lending and investment banking relationships,” “cause the Company to assist in the preparation of customary confidential information memoranda” and “other marketing materials,” try to get the debt rated by ratings agencies, and attend at least one meeting for prospective investors, “which meeting shall not exceed two (2) hours in duration and may be virtual.”
But the letter also says that “the Initial Lenders’ commitments hereunder are not conditioned upon the syndication,” and it goes on:
Notwithstanding anything to the contrary contained in this Commitment Letter or the Fee Letter or any other letter agreement or undertaking concerning the financing of the Transactions to the contrary, neither the obtaining of the ratings referenced above nor the compliance with any of the other provisions set forth in clauses (a) through (f) above or any other provision of this paragraph shall constitute a condition to the commitments hereunder or the funding of the Facilities on the Closing Date or at any time thereafter.
Musk agreed to help the banks sell this debt, but even if he doesn’t help they still have to put up the $13 billion themselves. He didn’t help — he hindered! — and here they are. If Musk and Twitter really are trying to close this deal within a few days, then the banks will have to provide bridge financing: They’ll just lend Twitter the $13 billion of their own money, and “take out” the bridge financing later by doing a bond offering to investors. Hopefully with some investor meetings and marketing materials — hopefully with Musk at least saying nice things about Twitter again — but who knows.
Also, what about the equity financing? Right now Musk’s committed financing consists mainly of (1) that $13 billion of debt from Morgan Stanley et al., which they will have to fund, and (2) his own promise to put up $33.5 billion of his own money. But he’s allowed to syndicate his $33.5 billion too: He can get co-investors to put in money with him, and reduce his own stake accordingly, though if those co-investors flake he’s still on the hook for the whole $33.5 billion. And in fact back in May, in the brief period between when he signed the deal and when he started flaking on it, Musk did raise about $7.1 billion of equity commitments from other investors. (As we discussed on Monday, plenty of other people were texting him asking to get in on the deal too.)
We have not heard much about those equity commitments in the last few months; when he was trying to get out of the deal for alleged fraud, Musk did not have time to go around marketing it to potential co-investors. But now he could use the money. Like presumably he’s going to text Larry Ellison again to be like “hey you’re still in for $1 billion right? Should be fun!” What will those conversations be like? Are those equity commitment letters still good?[6] Do those investors still want in? If they back out, will Musk sue them? Will their defense be “you said publicly that Twitter is a huge fraud, come on”?
Also: Is he going to try to raise more money? Is he going to go out to potential investors again and say “changed my mind, Twitter is great now, this’ll be fun, can I pencil you in for $1 billion?” We talked on Monday about Musk’s friend Jason Calacanis, who was trying to raise a special-purpose vehicle to invest in Musk’s Twitter deal, tapping individual investors with a $250,000 minimum. (“What’s going on with you marketing an SPV to randos? This is not ok,” texted Musk.) Will they restart that? Every little bit helps, no? What does the disclosure document for that investment look like? “Yes Elon Musk has said that Twitter is a dysfunctional fraudulent conspiracy, but everything is fine now, and it’s an accelerant to creating X, the everything app.” Choose wisely.
Anyway I’m tired of this and I have a new retirement plan. Every time this newsletter starts with “Programming note: Money Stuff will be off tomorrow,” Musk does something outrageous, and Twitter’s stock swings up or down. So I’m going to buy a bunch of Twitter straddles and then take a vacation, while Twitter is still public and that trick can still work. I’ll make a fortune.
