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The Risky Position Elon Musk is Placing Himself In

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Image: Daniel Oberhaus (Flickr)


What Would Failure Look Like to Elon Musk if He Buys Twitter?

 

Elon Musk is a winner. We witness his success daily, after all, he’s the richest person in the world. No one else can say that right now. But the challenges that took the South African-born immigrant from poor college student to his current status were not a straight line. And, taking over Twitter won’t be a sure win either, yet he is betting a lot of his previous financial success on his ability to acquire it and run it successfully.

As innovative, crafty and wealthy as Musk is, this potential acquisition of the social media giant, may put him in a political arena like he has never experienced before. Musk could find himself in a “deathmatch” with those that control the rules – in the ring with some that have been powerful enough to shape the version of Twitter that he is now trying to steer back toward inclusion.


Buying Twitter is not the Win

“Failure is an option here. If things are not failing you are not innovating.” – Elon Musk

The above Elon Musk quote was said prior to 2022. But, it is helpful to understand; he thrives on the challenge of doing things different, trying to do things that are meaningful. While many Elon fans are watching and expecting this larger-than-life person to handily succeed, he’s human and this deal must make him somewhat uncomfortable.

For Elon, success in buying Twitter, a company that had already reached a valuation well above his bid, is not the win. Transforming and re-innovating Twitter, against the wishes of many senior department heads, and against many political interests, is the ultimate goal. This could become a nightmare, after all, successfully sending a reusable rocket round trip into space is just physics, going against the grain of powerful people that want you to fail, goes beyond physics. It may present unseen, non-science challenges.


The Risk

Self-made billionaires don’t reach that category by depositing their paycheck into a JP Morgan Chase bank account to earn .01%. They get it by risking a great deal, by hiring the right team, putting in the necessary work, and maybe getting some breaks along the way. This is the largest acquisition financing ever by one person. It’s not chump change for Elon who is doing it his own unique way. He’s a proven manager, but he’ll be spreading himself thinner if he buys Twitter. And, may not find he is getting too many breaks from those in power positions.

More than two-thirds of the $46.5 billion financing package that Musk unveiled on Thursday (April 21) for his bid for Twitter would come from his own assets, the remainder would come from bank loans secured against Twitter’s assets. Typically, the majority of a buyout of this magnitude is funded by securing most of the debt against the acquired. Elon is taking two-thirds of the “lien” himself.

The banks approached showed concern that the regulators may reprimand them because of the size of the risk they would be putting on their balance sheet. The lack of cash flow from Twitter also created concern. They may have also been troubled that the would-be acquirer said he doesn’t care about the economics of the deal “at all.” Musk said that he was pursuing the acquisition because it was “extremely important to the future of civilization.”

The banks may have also pondered that Musk has suggested that he may move Twitter away from advertising, Twitter relies on ads for the majority of its revenue.

What amplifies the challenge for Tesla’s CEO is he has agreed to take out a $12.5 billion margin loan, secured against his Tesla (TSLA) stock to pay for a portion of the $33.5 billion. Were Tesla’s stock to drop by 40%, he would have to repay that margin loan, according to a regulatory filing.


The Twitter Side

Musk is the world’s richest person, with a net worth listed by Forbes of $270 billion. Yet most of his wealth is tied up in Tesla shares, and the proposed deal structure would dry up most of his available liquidity. Twitter’s board plans to ask Musk to provide more details on the source of the cash he has promised to deliver, according to people familiar with the matter.

Twitter’s board is preparing to reject Musk’s bid as too low by April 28, when the company is scheduled to report first-quarter earnings, sources have said.

Musk, who has amassed a stake in Twitter of 9.2%, said on Wednesday he’d be exploring taking a bid directly to Twitter’s shareholders via a tender
offer
. In that scenario, shareholders would not be able to sell their shares, because of the poison pill Twitter created. The shareholders would however be able to register their support for Musk’s bid.

Paul Hoffman

Managing Editor, Channelchek


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Placing a Bid to Own a Public Company

 

Sources

https://www.chase.com/content/dam/chase-ux/ratesheets/pdfs/rdny1.pdf

https://www.inc.com/alyssa-satara/in-2-sentences-elon-musk-explains-why-key-to-success-is-failure.html.

https://www.reuters.com/business/musk-tears-up-buyout-playbook-with-465-bln-twitter-financing-2022-04-22/

 

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