Elon’s Clues and an M&A Hail Mary

Elon Musk
Elon’s group of banks, led by Morgan Stanley and Bank of America, have underwritten $13 billion of senior secured financing in two tranches. Photo: Dimitrios Kambouris/Getty Images
William D. Cohan
October 30, 2022

It’s very early days, obviously, in the Elon Musk regime at Twitter, so even he deserves the space and time to try to implement his vision for the company. To his credit, and to my surprise, he actually closed the deal, although I still can’t imagine why, other than what would seem like a major hurdle to all but a handful of people in the world—risking $24 billion of his own money and another $7 billion committed by his friends and another $13 billion from his friendly bankers—seemed like a bit of a lark to Elon. In fact the whole episode seems like a bit of a lark to Elon. I guess if you are already the C.E.O. of Tesla (and SpaceX and The Boring Company) and you have a net worth of around $200 billion these days (down $66 billion so far this year), owning Twitter for $44 billion must seem a bit trivial, and a bit of fun, in the scheme of things. 

It’s not trivial, of course, to the 7,500 employees of Twitter, who are waiting to find out if they will continue to be employed at the company. After all, Elon’s already fired the company’s top executives—the C.E.O., the C.F.O., the chief legal officer, and the general counsel. That was probably to be expected; it’s not unusual in any change of control situation for the top executives to go, especially after a fight as contentious as this one. It also wouldn’t be unusual for these executives to walk off with tens of millions of dollars to go away, although some early reporting suggests Elon might have terminated them “for cause” in a bid to avoid any such payouts. (Nothing would be more characteristic of Elon than to begin his administration with a fresh wave of lawsuits.) 

What’s a bit weird, though, is how Elon seems to be toying with the lives of the other 7,500 Twitter employees. Will he fire 75 percent of them, as the Washington Post reported? Or will he find that he needs many of them to run the business? That’s the big unknown at the moment, and must be highly stressful for Twitter employees. Given that Elon now controls the company—he owns more than 75 percent of Twitter—and that it is a private company, with no publicly traded debt or equity and no longer any requirement to file reports with the Securities and Exchange Commission, he doesn’t have to share his plans with anyone, except perhaps his banks and his band of merry equity investors. Assuming he wants to keep some of the Twitter employees and that they have a hand in generating the $1 billion in Twitter EBITDA, he might want to actually communicate his vision for the company with them.

Which brings us to the financial implications of Elon’s Twitter deal. I’m not particularly concerned about the $31 billion of equity in the deal. That’s a lot of equity, no doubt about it, perhaps more equity than has ever before been invested in a L.B.O. But Elon and his buddies can afford to lose it, and they might very well lose it before all is said and done, unless Elon has some sort of magic plan for the company that he intends to trot out and implement at some point. No, the risk here, as I’ve written before, remains with Elon’s group of banks, led by Morgan Stanley and Bank of America, who have underwritten $13 billion of senior secured financing in two tranches. 

At the moment, the bank syndicate has opted wisely to hold onto the debt, rather than sell it off to investors as they would normally do when the financial markets are more robust. Even though holding on to the debt will gum up the works on Wall Street—Wall Street is the moving business, not the storage business; the debt has to be moved out to create capacity for more lending—the banks have decided the losses they would suffer by trying to sell now are too great. Better to hold the debt on their balance sheets, and not have to mark it to market (at least for the moment), especially during a relatively slow period in the leveraged finance deal business, than to discount it sufficiently to get it off their balance sheets and perfect their losses. And, of course, the debt is far safer on their balance sheets than in the hands of the loan-to-own crowd, as I’ve noted before (and will return to in a moment), since they can create a potential default nightmare scenario for Elon, regardless of how many employees he attempts to lay off to cut costs.

Hope springs eternal on Wall Street. And as bad as things seem now in the leveraged finance markets, there is hope that things will be better in early 2023, when maybe Elon will have articulated his plans for Twitter and the bankers might have a story about him and Twitter they can use to try to sell the debt. Or maybe the Federal Reserve will have decided to stop its campaign of raising interest rates by then, giving the banks a reprieve. Who knows? The way the banks think, it’s better to wait and hope for something better than to perfect losses today. 

But hope has never been a good strategy on Wall Street and it remains a poor one today. The problem for the banks is that the Fed will likely only allow them to keep the Twitter debt on their balance sheets, marked at par, or 100 cents on the dollar for so long. My bet is that the Fed will get impatient with banks that try to do that much beyond the first quarter of 2023. If the financial markets are still dysfunctional three months from now, the Fed will likely insist that the banks take their hit on Twitter. 

And then they’ll have the worst of both worlds—a significant markdown on the Twitter debt, requiring more capital to be reserved against it and a writedown, plus less capacity available for new financings. At that point, the banks are better off selling the debt, even at a significant discount, and taking their painful medicine. And that is when the real fun and games will begin financially for Elon, assuming he is not the buyer of the Twitter debt, himself. Once the Twitter debt gets sold off for a discount to distressed debt investors—they are generally not the warm and cuddly type of investors—then any payment or other technical default on that debt will likely result in a new serious headache for Elon: the risk of Twitter being forced into an involuntary bankruptcy by its irate creditors. 

If the banks are forced to sell off the Twitter debt at a discount sometime in the first half of next year, I suspect, Elon will conclude that he has little choice but to be the biggest buyer of that debt so that he can control what happens in the event of a default. After all this, he can’t allow that discounted debt to fall into the hands of those loan-to-own vulture investors who would love nothing more than for Twitter to default on an interest payment so that they could take control of the company away from Elon. To prevent that from happening, Elon may have to pony up a few more billion dollars—maybe another $4 billion or so—buying up the majority of Twitter’s debt at its discounted price when the banks decide they have no choice but to sell it. (The math here: say the $13 billion of debt is worth 60 cents on the dollar, or $7.8 billion. Buying just over half of it from the banks is another $4 billion for Elon’s account.)

In fact, if I were him, and I were still worth $200 billion after this ridiculous Twitter shitshow, I might be already in negotiations with the banks to buy the Twitter debt so that it never hits the market in the first place. In for a dime, in for a dollar, I guess. 

Kiss the Cook

If you build a better mousetrap, the world will beat a path to your door. That was an observation made by Ralph Waldo Emerson in the late 19th century, and it seems that it’s still true today. Quite simply, Apple is continuing to make products that people want, with the iPhone remaining at the top of the heap as one of the world’s greatest consumer products of all time. Despite the carnage all around Apple—whether at Meta, Amazon or Snap—it is continuing to perform, virtually without a financial hiccup. 

Apple’s revenue was some $90 billion in its fiscal fourth quarter, ending in September, a record for the quarter, and its net income was $20 billion, its best ever. It’s truly a remarkable accomplishment, given the stressful economic environment. 

The report buoyed investors, who added something like $160 billion in market value to Apple’s valuation on Friday alone. Apple is now worth $2.5 trillion, down 14 percent year-to-date, which is also pretty impressive when you consider that Meta is down 70 percent in 2022, Amazon stock is down 40 percent year-to-date, and Microsoft stock is down 30 percent this year. All of which proves, yet again, the profound genius of Steve Jobs. Not only did he resurrect Apple from the ashes during his second tour of duty at the company, but he also had the vision to select Tim Cook as his successor. 

Cook, now in his 11th year leading Apple, took over the company when it was worth around $350 billion. Since then, he has added more than $2 trillion to Apple’s value, making him the C.E.O. who has created more wealth for shareholders than pretty much any single person in the history of the world. What’s more, as a manager and not a founder or an early investor in Apple, his own personal wealth—estimated at $1.8 billion—is relatively modest compared to the wealth he has created for others. 

While the media is obsessed with the wealthiest Americans, such as the aforementioned Elon Musk, Jeff Bezos, Bill Gates, and Mark Zuckerberg, maybe more of our admiration should go to someone like Cook, who has literally created $2 trillion of value for others while taking only a tiny sliver of that reward for himself. Talk about financial alchemy.

More Suisse Cheese & Michael Klein Mythology

Let’s pause for a moment and consider just what the heck is going on at Credit Suisse, the big Swiss bank that has been struggling for years. The bank has a market value these days of around $10 billion, down more than 60 percent this year alone. (For some perspective on that, 22 years ago, Credit Suisse paid $11.5 billion for DLJ, the tony investment bank. Poof!) In an attempt to right the ship after years of scandal—including Spygate, Archegos and Greensill, among others—Credit Suisse announced this week that it was getting out of the investment banking business after a failed 35-year experiment, starting in and around 1988 when the bank bought 44 percent of First Boston. But what Credit Suisse has proposed requires a step back to contemplate. 

All we have at the moment is an announcement, and it’s a doozy. The idea here, apparently, is for a Credit Suisse board member—the ubiquitous American investment banker Michael Klein—to merge his small advisory boutique, M. Klein & Company, into Credit Suisse’s fledgling investment bank that will revert to the CS First Boston name, and then to launch the merged businesses as a standalone investment bank, with Credit Suisse still owning a majority stake in the entity but with Klein, as its C.E.O., leading the hunt for new investors in order to further dilute Credit Suisse’s ownership stake in CS First Boston. 

Klein, of course, made his name on Wall Street at Citigroup 15 years ago as one of the leaders of that company’s investment bank. He was also considered as a serious candidate to lead Citigroup but that did not happen. He has been on the board of Credit Suisse since 2018 and was heavily involved with advising Credit Suisse on how to dispose of its investment bank. Apparently, the idea of Klein merging his advisory firm with CS First Boston, with Klein as C.E.O., came about only in the days prior to the announcement of the deal, suggesting to me, anyway, that Credit Suisse must have been unsuccessful at trying to sell its investment bank, or received valuations for it that were unappealing. 

I’m not surprised that there would be no takers for a second-tier investment bank at the moment. First, the Federal Reserve would have to sign off on any such sale, or combination with another investment bank, and the Fed has not greenlighted any horizontal investment banking mergers since the desperate days of the 2008 financial crisis. There doesn’t seem to be any inkling that the Fed will allow such combinations anytime soon. 

And who would want CS First Boston anyway? Such combinations are notoriously difficult to execute from a financial and cultural point of view, and that’s under the best of times. With the capital markets pretty much moribund, why take on the headache of trying to buy and integrate someone else’s investment bank? JPMorgan Chase, Goldman Sachs, Bank of America, and Morgan Stanley have enough of their own troubles at the moment without wanting to inherit the CS First Boston nightmare. 

There is some precedent for the structure that Credit Suisse is proposing for CS First Boston. In 2014, Blackstone merged its M&A advisory business with a small M&A boutique run by ex-Morgan Stanley banker, Paul Taubman, to create PJT Partners, with Blackstone owning a significant chunk of the equity. PJT has performed surprisingly well under Taubman’s leadership. The company’s stock is up 164 percent since it started trading publicly in 2015 and it’s valued at around $1.7 billion, still small by Wall Street standards, but punching above its weight. 

CS First Boston will be lucky if it can end up performing like PJT. To try to continue to compete in the capital markets business—historically a source of some success for CS First Boston—the Klein-led investment bank will need capital. In making its announcement this past week, Credit Suisse said that an unnamed investor would make a $500 million investment in CS First Boston—unnamed, really?—and that a big new investor in Credit Suisse, the Saudi National Bank, might also consider an investment in CS First Boston. It’s hard to imagine, at the moment anyway, what kinds of clients will seek out this independent CS First Boston to act as a lead underwriter on the sale of debt or equity securities without access to Credit Suisse’s balance sheet. The only non-bank affiliated investment bank that attempts to also underwrite securities and to trade is Jefferies Financial Group, with a market value of nearly $8 billion. 

None of the investment banking boutiques, including Moelis & Co., Lazard, Evercore and PJT, among others, have a meaningful capital markets business. The big players in the capital markets, such as JPMorgan Chase, Bank of America, Goldman, and Morgan Stanley have big balance sheets at their disposal. In a memo to CS First Boston employees, David Miller, a longtime investment banker at the company, wrote that the new firm would be an “M&A boutique with capital markets expertise.” That might be a fine idea, but at the moment, there really is no precedent on Wall Street for a boutique of that description having much success, with the possible exception of Jefferies, which is more of a capital markets firm with M&A expertise, rather than the other way around.

Then there is Michael Klein’s recent spotty track record, during his great adventure in the SPAC markets. He’s made himself plenty rich but the investors along for the ride have taken it on the chin. Klein has raised nearly $7 billion in seven SPACs since 2018, all under the banner of Churchill Capital Corp. His first SPAC raised $690 million and merged with Clarivate Analytics, in May 2019. Its market value is $7 billion these days and its stock is up 8.4 percent since its merger with Klein’s SPAC. Klein’s second SPAC also raised $690 million, in October 2020, and then merged with Software Luxembourg Holding. It is now known as Skillsoft Corp. It has a market value of $300 million; its stock is down 82 percent since it went public through Klein’s SPAC. His third SPAC raised $1.1 billion in July 2020 and later merged with Multiplan Inc., a provider of healthcare cost management solutions. Multiplan has a market value these days of around $1.7 billion, down 73 percent since Klein’s SPAC took it public. 

In July 2021, Klein’s fourth SPAC merged with Lucid Motors, the luxury electric car maker. That SPAC has performed relatively well. Lucid’s market value is nearly $24 billion; the company’s stock is up 44 percent since it merged with Klein’s SPAC, although it is down nearly 75 percent since Lucid’s all-time high reached last November. Klein’s other three SPACs—Churchill Capital Corp V, VI and VII—have a total of around $2.2 billion in dry powder that Klein raised from investors who are hoping he can put it all to work before the two-year clock on these SPACs begins to run out, in December and then in February 2023. (Each of those three SPACs trades at roughly the value of the cash they raised on their I.P.O.s. And chances are that cash will be returned to investors, unspent, as the SPAC market continues its disappearing act.) 

Michael Klein is a Wall Street survivor. He’s managed to become fabulously wealthy as an investment banker who has never really fulfilled his tremendous promise. Now, he has a chance to do so as the C.E.O. of CS First Boston. I’m sure he’ll be well rewarded if he manages to find the capital needed to compete in the business of underwriting debt and equity securities where the firm will face intense competition in a perilous market. CS First Boston, despite its pedigree as the onetime home of legendary dealmakers Bruce Wasserstein and Joe Perella (Wasserstein passed away in 2009; Perella is now at Perella Weinberg Partners, an M&A boutique), will also have serious competition in the lucrative business of advising on M&A deals, at a time when that market has also come to a grinding halt. Klein’s task is not impossible, but it sure looks like it will be an uphill climb for him and for Credit Suisse on their road to redemption.