I was speaking the other day with a billionaire hedge fund manager, one of the dozen or so most powerful people on Wall Street, to get some fresh insight into the ongoing Elon Musk-Twitter hostage negotiation. Was it real, as I’ve contended, or was it all bullshit, as many others have suggested? “I love it,” he said. “I think it’s great.”
This investor went on to say that the offer was a great boost for activist investing, which he feared might have been proclaimed dead “prematurely” what with Bill Ackman’s recent pronouncement that he was pretty much abandoning the activist approach to investing, in favor of investing in great companies and sticking with them for the long haul, like his hero, Warren Buffett. “This is actually a really good time for real, old-school activism,” he added, surmising that Elon is surely enjoying the mountain of attention he’s getting from making an offer for Twitter. “I’ve observed it in myself,” he continued, “like the dopamine receptors and the neurological response that you get from it. I’m sure he’s getting a rush out of it. And probably, when you get to his stage”—meaning his level of extreme wealth—“anything that gives you that kind of stimulation” is exciting.
Musk may be getting there. Indeed, all that stands between him and Twitter, the strange prize he covets, is proving to the company’s board of directors, and its financial advisors at Goldman Sachs and JPMorgan Chase, that he has the $40 billion or so he needs to buy the 90.9 percent of Twitter’s stock he doesn’t already own. It’s not known outside his tight circle how much O.P.M.—that’s Other People’s Money—he needs to pull this off. While Musk’s ownership stake in Tesla is worth around $173 billion these days, it’s not clear how much of that stock Musk has already encumbered and how much he still has available to sell or to margin, or to rehypothecate, to raise the money he still needs. One thing is for sure: It won’t be as easy as it may look from the outside, even though his $255 billion net worth is nearly six times what he theoretically needs to buy Twitter.
There are major tax implications for Musk if he sells Tesla stock, Elizabeth Warren will be happy to know. And there are major implications for Tesla’s stock if the company’s largest shareholder and C.E.O. starts selling his stock to buy Twitter, or if he margins it and gets a margin call at some point down the road should the Tesla stock start a downward cycle, which is probably inevitable given its market valuation. In other words, there are limits, unknown publicly, to how much encumbering Elon can do before the lenient Tesla board puts the kibosh on him, and the Tesla shareholders start freaking out. The question remains: Is Elon willing to risk all, or most, of what he has created in Tesla, as precarious as that is, to buy Twitter? Is the dopamine hit that good?
The Prefs
If activist investing—and its first cousin, the hostile takeover—is a dervish-like dance that coalesces around finance and public relations, Musk’s only real flaw to this point has been that he did not lay out the financing for his $54.20 a share, $43 billion bid for Twitter in his filings with the Securities and Exchange Commission last week. It’s hard to take seriously any hostile bidder—even the world’s richest man—if he hasn’t laid out the chapter and verse of where he is going to get the money he needs. But, once Musk does that—and he seems to be inching closer and closer—it will be game over, or game on, depending on your perspective, for Twitter as an independent, publicly traded company. He’s also started hinting in recent inscrutable tweets, in typical Elon Musk-like fashion, that he’s about to launch a cash tender offer for the Twitter stock he doesn’t own—a move that requires his financing to be in place and a new round of S.E.C. filings.
Musk may be a lot of things—a flake, an iconoclast and a weirdo, among them—but he is not a fool. He will not risk what he’s built in Tesla to buy Twitter. What he presumably will do, and seems to be doing, is seeing how much money he can raise from other people to support his offer. Let’s assume, for the sake of argument, that in addition to the $2.6 billion that he has already spent on Twitter stock to accumulate his 9.1 percent stake, that he has another $20 billion of his own money, available one way or another, to use for this fever dream. Can he still raise the other $20 billion he needs? That is the only question that matters right now.
Of the $20 billion he would need to raise, I figure that some $6 billion can be obtained in the form of senior debt from a syndicate of Wall Street banks, some of whom are reportedly already looking at providing him that money. I get to that number by generously granting that Twitter might be able to generate $1 billion of EBITDA in 2022. That would be roughly in line with what Twitter has done in the past few years, assuming you do the various add-backs, which I hate, that the Twitter management would no doubt insist upon. Since Twitter already has about $4 billion of existing debt, I figure—again generously—that there might be another $6 billion out there for Elon. That would make $10 billion of debt on $1 billion of EBITDA. I know that would normally be a big stretch, but let’s give it to Elon for the sake of argument. He’s the world’s richest guy, after all, and the fact that maybe he could put more than another $20 billion of his own money into this contraption might give the Wall Street banks the additional comfort they need to be super-aggressive for him. He might also offer, or be forced, to guarantee the bank debt.
Where, then, does the next $14 billion come from? There is plenty of dry powder out there in the land of private-equity funds, hedge funds, and sovereign wealth funds to pull this off. It won’t be cheap money, and it will probably come in the form of expensive convertible preferred stock. But if Elon wants Twitter, he will have to step up to this form of expensive financing, which would be the obligation of the newly private Twitter, not his own liability, of course.
The good news is that there are already stirrings in the marketplace suggesting that there is interest in being part of Elon’s play. According to published reports, both Apollo Global Management, with nearly $500 billion of assets under management, and Thoma Bravo, a buyout firm with about $100 billion under management, have expressed interest in partnering with Musk. Apollo, under the new and improved leadership of Marc Rowan, is being especially aggressive and creative these days. The firm recently merged with Athene, a big insurance company, giving Rowan et al. even more capital to put to work. Apollo could easily provide financing to Musk at all levels of the capital structure from the top—the senior secured debt—to some form of equity, whether preferred or common. If Apollo was willing to spend $5 billion to buy Yahoo!, I have no doubt that, for a price (and not a cheap one), Apollo would be more than willing to finance Elon’s buyout of Twitter. I would pay to see Elon Musk and Mark Rowan in the same board room.
There’s a lot more money out there besides Apollo and Thoma Bravo. According to the Financial Times, Blackstone, Vista Equity and Brookfield Asset Management are passing, but there are plenty of other big private-equity kahunas, any of whom could join together to help Musk buy Twitter. Personally, I’m not sure I see it, but given how much money they have to put to work, it’s not out of the question for them to consider tossing $1 billion, or so, into the mix, in exchange for a convertible preferred with a decent, 7 percent, current return plus an option to convert into common equity if Musk is able to deliver on his promises of making Twitter more profitable.
There are also sovereign wealth funds—among them, Temasek, in Singapore, or the Norwegian sovereign wealth fund, with $1.3 trillion to put to work, or P.I.F., the Saudi sovereign wealth fund, with approximately $600 billion under management. Any one of these could help Elon out, for a price. Once upon a time, Softbank, and its leader Masayoshi Son, would have been all over this opportunity, and in a big way, but those days are probably over for now, in the wake of the WeWork disaster and the fund’s other troubles in tech land. Still, if Elon is willing to reward these investors for the risk of investing alongside him in taking Twitter private, I have no doubt he will be able to raise the money he needs to make his $54.20 offer real.
Shmoison Shmill
If he does secure the funding—and the statement is ratified by his bankers at Morgan Stanley and in a filing with the S.E.C.—then I don’t see what choice the Twitter board will have but to try to negotiate a deal with Elon. Let’s be clear: there is no other buyer for Twitter, not at $43 billion, or 43x EBITDA. If there were even a hint of another buyer out there, the Twitter stock would have traded up beyond Elon’s offer, and that has not happened. So forget another buyer, even though I’m sure Goldman Sachs is out there shaking every tree it can find to see if Anyone But Elon is out there.
Of course, the other question that Goldman Sachs and JPMorgan Chase must answer for the Twitter board is whether $54.20 a share is a fair offer, from a financial point of view, for the Twitter shareholders. Some have suggested that the mere fact Twitter stock touched $73 at one point last July implies that the board cannot sell the company to Elon Musk for $54.20, or 25 percent below its 52-week high. Unfortunately, that’s irrelevant today. What’s more relevant is where the Twitter stock was trading before Elon started buying his shares on January 31, and where the Twitter stock was trading before he announced that he owned 9.1 percent on April 4. By both those measures, Elon has offered Twitter shareholders a meaningful premium of 54 percent and 38 percent, respectively. What also matters is whether offering a price of 43x 2022 estimated EBITDA is fair. Goldman Sachs will be hard pressed to argue that the offer isn’t fair. And as someone who offered many fairness opinions during my banking career, I know the offer is more than fair—it’s downright generous. It’s worth noting that in February, Eric Sheridan, the Goldman research analyst who covers Twitter, had a $30-a-share, 12-month price target on the Twitter stock. It was a “sell” recommendation. So, ya know.
And what about the value of Twitter based on a discounted cash-flow basis, another test that Goldman and JPMorgan must perform for the Twitter board of directors? This is where the M&A hijinx can really get fun. But even with a little investment banking sleight-of-hand, and with projections that look like the left side of the Matterhorn, the Twitter bankers will have to stretch pretty far to say that the Musk offer is not fair on a discounted cash flow basis. In fact, there isn’t a single measure by which Goldman and JPMorgan can argue, professionally anyway, that $54.20 is not fair. It may not be enough to get Musk an agreement with the Twitter board—despite Elon’s comment that it’s his best and final offer, I’m sure he’s got a few bucks more in his pocket—but it certainly is fair from a financial point of view to Twitter’s shareholders.
What about the Shareholders Rights Plan, or the “poison pill,” as it’s conventionally known on Wall Street? Will that thwart Elon? The short answer is no. All the poison pill will do is, possibly, slow Musk down in his effort to acquire Twitter, not that he’s moving all that quickly at the moment anyway. If he can get the $43 billion in cash together, and prove to the Twitter board that he has it, then it’s just a question of price. I could be wrong, but I can’t recall a single instance where a poison pill was invoked—that shareholders of a company actually bought gobs of discounted stock to thwart a hostile takeover. All that happens when the poison pill is put in place is that the hostile acquirer needs to negotiate a deal with the board, which should be relatively easy for Elon to do, if his financing is in place. Let’s not forget that every hostile deal turns friendly in the end, if a deal gets done.
Poison pills are generally viewed on Wall Street as a necessary step in the deal making process. In other words, if a company, like Twitter, didn’t already have a poison pill in place, then, fine, put one in. And that becomes another minor hurdle to be overcome. But poison pills are also viewed as shareholder-unfriendly because they are an impediment to shareholders getting the cash in the offer that has been made. Shareholders don’t like that, although boards of directors do, since it slows the process down and gives them a chance to get their act together. But if you look at Twitter’s largest shareholders besides Elon Musk—Vanguard, BlackRock and Morgan Stanley Investment Management, which together own about 25 percent of Twitter—these are not long-term holders. These are holders who are fiduciaries for thousands of retail and institutional investors, who may want nothing more than getting their hands on the $54.20 in cash that Elon is offering. If he firms up his offer with the financing, these three investors will be in his camp in a nanosecond.
And what about the board? This is a group of people who own a de minimis amount of Twitter stock. They have no skin in the game. I’m not sure what the moral, or financial, case is for them to say no to Musk if his financing is firmed up. They will say no, at first, of course. That is M&A playbook 101. But if that financing is put in place, I am not sure how they can possibly say no for very long. The only current Twitter board member with actual skin in the game is Jack Dorsey, one of the Twitter founders and a former C.E.O. of the company. He still owns about 2.4 percent of Twitter, while the board as a whole owns 2.6 percent of Twitter. Absent Dorsey, who is leaving the board after the annual meeting next month, the rest of the board owns 0.2 percent of the company. “Wow, with Jack departing, the Twitter board collectively owns almost no shares!” Musk tweeted on Saturday. “Objectively, their economic interests are simply not aligned with shareholders.” Even Dorsey criticized his own board. “It’s consistently been the dysfunction of the company,” he tweeted.
On Wall Street, according to one longtime M&A banker I know well, the time has come for Musk “to put up or shut up.” He said that Musk has lost some—but not all—credibility on Wall Street because of the deal Tesla did for SolarCity, in 2016, which most people think made no strategic sense for Tesla and that he rammed through the Tesla board as a way to help SolarCity shareholders, some of whom were his relatives and who otherwise would have been toast. He also lost credibility on Wall Street, in August 2018, when he tweeted that he wanted to take Tesla private for $420 per share and, famously, that the “funding” for the buyout was “secured,” even though it most definitely was not secured and the deal, obviously, never happened. “He’s a ‘ready, fire, aim’ kind of guy,” my friend continued, “and maybe it’s served him well.” He then quickly added that, on the other hand, he is the world’s richest guy and Tesla is a trillion-dollar company and SpaceX is pretty impressive, too. “I mean, you can’t really argue with his success,” he said.
I also asked the billionaire hedge fund manager if he thought Elon would prevail. He paused for a minute or two, and then offered up a poignant observation about Musk. “He’s such an inscrutable guy, an enigma,” he said. “I just don’t know what he’s thinking. I think if he really, really wants it and is willing to go through the hassle, he’ll get it.”
