These two factors make this deal a potential disaster and will compel investors, managers, users and society to think more clearly and seriously about the role of social media companies in an age distorted by viral and disinformation. LBO deals usually involve the acquisition of another company using a large amount of borrowed money (bonds or loans) to cover the acquisition cost.
The assets of the acquired company are often used as collateral for the loans, along with the assets of the acquired company. Making publicly traded companies private by accumulating debts on them and using cash flow to pay off those obligations.
Along the way, companies that acquire publicly traded companies aim to make their goals more competitive and innovative. That’s the theory anyway, but this deal-breaking wave of buyouts, which began in the 1980s and culminated in 2007, has strayed.
The LBOs transaction scene has become quieter after the 2008 financial crisis, but good returns for investors and low interest rates have caused transactions to reach new heights in recent years. If Musk gets Twitter, it will inevitably become a notable case study of the impact of LBOs deals. Of course, Musk’s presence means acquisitions aren’t just one thing, so let’s check the arithmetic of the deal.
Musk says he pledged $21 billion of his own money, and he’s supposed to sell a large portion of Tesla stock to raise that money. Banks will lend him $12.5 billion, collateralizing an additional $62.5 billion of his Tesla stock. The remainder of the purchase price and other costs will be funded by the $13 billion in debt that Twitter will incur. Eventually, Twitter will have about $1 billion in interest payments due annually.
Perhaps that will be under control. Twitter’s projected cash flow (money withdrawn before interest, tax, depreciation, and amortization) is expected to be about $1.43 billion this year and $1.85 billion in 2023. So debt payments will consume a large portion of Twitter’s cash flow.
Musk will have about $1 billion in interest payments, too, and if Tesla shares run into difficulties, he could be squeezed. Twitter itself will have to turn around to make the kind of money it needs to be profitable and self-sufficient. So there will be pressure on Musk to make the finances work. He is said to have big plans to do so. But he also said he was not interested in Twitter for economic reasons, which made potential financiers think twice. The deal “would not make much sense for most private equity investors.”
But Musk convinced Morgan Stanley, Bank of America, Barclays and other big players, in part because of what Bloomberg News called his “excitement for the deal.” But it is assumed that large corporations such as “Morgan Stanley” have taken due diligence measures. Or maybe you also want to stick with Musk’s good vibes until you’re in a good position to get the deal flow from Tesla? We’ll see over time.
Investors expressed some optimism, sending the stock price up more than 3% on Monday, although it is still below the offer price of $54.20 per share. Musk has yet to provide meaningful details about exactly what he will do to increase Twitter’s effectiveness. He was an effective and daring leader at Tesla – but Tesla makes electric cars, it’s not a media company.
Managerial progress often does not translate across different types of businesses. Media companies have found the digital age to be challenging, with evaporating or finding new channels and subscription revenue difficult. Media companies also provide a public service. In an ideal world, responsible media companies keep users informed, monitor how power is used and how society develops, and provide forums for ideas.
Musk has used social media to play games with his business interests, cheat people he doesn’t like, and break the law and regulators. None of that works for an enlightened media management. As we’ve also learned from Facebook and Twitter’s myriad work to monitor and disinformation, social media companies need to do a better job of vetting information on their platforms. Musk shows no sign that he can do the job.