Elon Shock Therapy & Ackman’s Mistake

Tesla C.E.O. Elon Musk
“Obviously myself and the other investors are obviously overpaying for Twitter right now,” Elon said on a Tesla earnings call this past week. Photo: Carina Johansen/Getty Images
William D. Cohan
October 23, 2022

After six months of delays and high drama, Elon Musk’s takeover of Twitter is expected to close no later than Friday, the final deadline that judge Kathaleen McCormick has given him to complete the $44 billion transaction, unless he wants to find himself back in court. Of course, this is just the end of the beginning as it pertains to Elon’s real headache, which will be to wring more cash out of a company for which he obviously overpaid and, presumably, to eventually make himself and his investors whole and then some. 

That’s no easy task. Twitter is a 16-year-old company that didn’t turn its first profit until 2018 and is barely generating enough free cash flow to keep its new crop of creditors at bay. If the deal closes, Twitter’s leverage will be a massive 13x EBITDA and, at least for now it seems, the Wall Street banks will hold onto the debt rather than sell it off and perfect their losses.

Apparently, Elon’s first order of business will be to cut some 75 percent of Twitter’s 7,500 employees, according to The Washington Post. I saw one estimate—on Twitter, natch—that figured this would generate savings of around $500 million a year, equal to roughly half of Twitter’s EBITDA and probably a greater percentage of its free cash flow. It’s difficult to know for sure how accurate this is: In 2021, Twitter had $3.1 billion in non-cost of goods sold costs and expenses, some of which obviously comprised salaries and benefits, but just how much can’t be deciphered from Twitter’s financial statements. In any event, assuming Elon is not just being provocative, cutting 75 percent of the workforce, or even talking about doing it, will be devastating for employee morale, to put it mildly, and that’s for a company that’s already been put through the wringer for much of 2022. It’s also an extraordinary indictment of existing management if three-quarters of the workforce is irrelevant, or expendable, at least in Elon’s assessment, which tells you how little faith Elon has in the existing leadership team.