Elon’s Pivot & Banker Bonus Blues

Elon Musk
This week brought new developments in Musk's quest to own Twitter. Photo: Yichuan Cao/Getty Images
William D. Cohan
June 22, 2022

We now have a couple of new developments in the long-running soap opera that is, theoretically anyway, Elon Musk’s takeover of Twitter. First, on Tuesday morning, a revised preliminary proxy statement from Twitter was filed with the S.E.C. Of course, since the proxy is not marked to show changes—it should be!—it’s difficult to know what’s actually new. There is a grand invitation to shareholders to attend a “special meeting” to vote on Elon’s proposed $44 billion acquisition but there is an asterisk in place of where the date for the meeting should be. There is also the use of the subjunctive in the proxy, as in, “If the merger is completed, you will be entitled to receive $54.20 in cash…” 

A big if! At least the year—2022—is written in black ink. So, I’m not sure that this proxy update is much different than the one filed on May 17, but it is another step forward, by the company anyway, to make it seem like the deal is on track to happen. (By the way, if any of the lawyers or bankers working for Twitter would care to share the differences between the May 17 preliminary proxy and the June 21 preliminary proxy, I’d love to hear about them.)

Which gets us to weird commentary about the deal that Elon made Tuesday morning to Bloomberg editor-in-chief John Micklethwait at the Qatar Economic Forum. Elon himself was in New York City, apparently, where it was 3 a.m., which might explain his relatively incoherent answers to Micklethwait. Asked where the Twitter deal stands at the moment, Elon said there were three hurdles still to getting the deal done. They are, according to Elon, resolving whether the “fake and spam users” of Twitter are less than 5 percent of users, as Twitter claims, or a higher number of users, as Elon thinks. It’s a “very significant matter,” he told Micklethwait. Then there was the question, he said, of the “debt portion” of the financing for the deal and whether that will “come together.” Finally, he said, he awaits, as do we all, the Twitter shareholder vote approving the deal. Will they vote in favor of the deal, Elon wondered? 

Micklethwait, alas, did not follow-up with Elon on any aspect of this response. (He did ask if Elon wanted to be Twitter C.E.O., which prompted him to say that he only wanted to “drive the product and the technology” in the “right direction” as he does at Tesla and SpaceX. He said he didn’t need to be C.E.O. to do those things.) So let’s take Elon’s answers one at a time. There is no question, of course, that Twitter shareholders will vote overwhelmingly to receive $54.20 in cash, as Elon has promised to deliver via a merger agreement he signed on April 25. So that is a totally moot point, Elon. Once the vote gets scheduled (see above), shareholders will vote to receive Elon’s money at a massive premium to where the stock is trading now. The whole bot issue, meanwhile, seems to me to be a total red herring. Who cares whether the percent of fake, or annoying, accounts are 5 percent, or 40 percent? It is what it is and Elon knew that well before he made his offer and signed the merger agreement. The discrepancy, if there is one, will hardly result in a material adverse change sufficient to give Elon an out. I am not sure why he keeps beating this dead horse to death. But he does. 

Then, there is his passing reference to the “debt” portion of the deal coming together. What? The most certain part of the Twitter financing from the beginning has been the commitment from a group of leading U.S. and global banks to provide the $13 billion of senior debt financing for the Twitter deal. Now while it is true that that debt financing cannot actually occur until Elon owns Twitter—he can’t pledge the Twitter collateral to the banks until he owns the company—there has been no suggestion that I’m aware of that the banks are considering withdrawing their commitments to provide this financing. So I wonder just what the heck Elon is talking about here. 

Now what is a major open question for the deal, and not mentioned by Elon or asked about by Micklethwait, is who will supply the rest of the $33 billion in equity that Elon has promised to provide for the deal. As my faithful readers know well by now, he has managed to corral about $13 billion (including about $7 billion committed by a group of co-investors), leaving him about $20 billion short. If he had used the word “equity” with Micklethwait instead of “debt,” I would certainly agree with Elon that there remains a major hole to be filled—a hole so large, in fact, that it could scupper the deal. But the debt portion of the capital structure has been spoken for since April and hasn’t come into question.

In my opinion, once again, Elon’s answers have served to obfuscate rather than clarify where the Twitter deal is going, if anywhere other than the dustbin of history. And, as usual, the Twitter shareholders are the wise ones here. The stock has fluctuated in the $37 to $38 range after Elon’s comments in Qatar. In other words, shareholders remain skeptical that Elon will complete the deal as promised. Nothing he said in Qatar to Micklethwait has changed or clarified that. If anything, he’s once again figured out a new way to confuse the market about his intentions.

Endless Summers

Our friend Larry Summers is suddenly ubiquitous, talking about the inevitability of a recession given high employment rates, high inflation and increasing interest rates. There he was on CNN’s “State of the Union” last weekend, and then again on NBC’s “Meet the Press” on Sunday. Well, good for Larry. He’s been right about inflation and right that the Federal Reserve stuck with its zero interest-rate policies for way, way too long. It’s a good thing when the mainstream media finally gets around to featuring people who predicted the fallout of our wayward economic policies, especially when they have the kind of credentials that Larry has: former economic wizkid, former Treasury secretary, former Harvard president and former national economic adviser. As I wrote the other week, he should have been appointed chairman of the Fed under Barack Obama, as had been promised to him. Had he gotten that role, I dare say, we likely would not be facing the prospect of the recession and the financial crisis that we do today.

In any event, Larry’s victory lap won him an audience with Joe Biden. Speaking from Rehoboth Beach, a day after falling off his bike, the president said he had spoken to our friend Larry about the likelihood of a recession. Larry, of course, thinks it’s inevitable. “I base that on the fact that we haven’t had a situation like the present with inflation above 4 percent and unemployment beyond 4 percent without a recession following within a year or two,” he told Chuck Todd on Sunday. Biden begs to differ. 

Ironically, and confusingly, Biden took several of Larry’s talking points about how to limit inflation in order to dismiss Larry’s argument that a recession is inevitable. For instance, on “State of the Union,” Larry said the administration could help reduce consumer prices by lowering prescription drug costs, by rescinding some of Donald Trump’s tariffs on China, and by repealing the Trump corporate tax cuts, raising the ridiculous 20 percent corporate tax rate back to something more reasonable. After speaking with Larry, Biden said he didn’t think a recession was “inevitable,” refuting the comments that Larry had made to Todd. “I think we’re gonna be able to get a change in Medicare and a reduction in the cost of insulin,” Biden said. “We also can move in a direction that we can provide for tax increases … on those in the corporate area as well as individuals as it relates to Trump’s tax cuts.” 

I’m not an economist, but I’m not sure how lowering the cost of prescription drug costs will help America avoid a recession in the face of rapidly rising interest rates after nearly 13 years of the Federal Reserve manipulating them downward to create one asset bubble after another. I am all for lower prescription drug costs, but is that such a large problem as to help avoid a recession? As for repealing the idiotic Trump tax cuts, yes that would help with the federal budget deficits, which I guess would ease some economic pressure. But let’s be honest, is this Congress, or the next one for that matter, going to repeal the Trump tax cuts? Is any legislator even mentioning this as a realistic possibility? I rest my case.

As for how all this jibber jabber is going down on Wall Street, there is the official reaction which shows up in the revised predictions at firms like Goldman Sachs about the likelihood of a recession. Goldman has upped its prediction of a recession in the U.S. in 2023 to 30 percent, from 15 percent. Thank you Goldman Sachs, but of course this is meaningless pabulum. Then there is the unofficial concern about what this market turmoil will do to Wall Street, which is a whole separate matter. 

What Wall Street is really concerned about, of course, is the widespread drop off in investment banking business. The I.P.O. market has dried up in the face of the rapid decline of the equity markets. The high-yield market has dried up, as rates rapidly increase and prices for existing high-yield securities melt down. The leveraged loan market has dried up. The L.B.O. market, too, is frozen until the rate increases stop and buyers and sellers can again get their collective minds around what’s the right price for an asset. And the M&A market is more or less moribund. In other words, investment banking business on Wall Street has taken a major hit so far in 2022 and shows no near-term signs of abating, at least until the Fed finishes with its interest rate increases. That means lower bonuses by far in 2022 than 2021. 

When Wall Street thinks about the likelihood of a recession, or a financial disruption, or what it all will mean for Main Street, what’s really going on is that Wall Street bankers are struggling to keep busy and are worried first about whether the ax is coming for them, and second how they will possibly survive with a bonus of less than $1 million. As one senior banker wrote to me the other day, “activity” in the equity capital markets is “virtually nil” and there won’t be a “functioning I.P.O. market” until September at the earliest. Compensation will “be a disaster” but there’s little talk of “headcount” cuts yet. “Natural attrition and low bonuses will solve that,” the banker wrote. And this is all before a recession takes hold in 2023, or doesn’t take hold, whichever the case may be. This is what Wall Street worries about right now.