Twitter has gone to Elon Musk for $44 billion, making the deal one of the largest leveraged buyouts in Wall Street history. It gives Tesla Inc.’s steward a powerful social media perch.
The math is sketchy, however, as are Musk’s intentions. Both of those factors promise to make this deal a potential train wreck and will force investors, managers, users and society to think more clearly and seriously about the role that social media companies play in an era scarred by viral propaganda and misinformation.
Musk’s presence means the buyout isn’t just one thing, so let’s examine the math. Musk says he’s pledging $21 billion of his own money and will presumably sell a chunk of Tesla stock to raise those funds.
Banks are going to lend him $12.5 billion, secured by an additional $62.5 billion of his Tesla shares. The rest of the purchase price and other costs will be funded by $13 billion in debt that Twitter will take on.
A close call
Maybe that will be manageable? It’s a close call. Twitter’s cash flows (the money it hauls in before accounting for interest, taxes, depreciation and amortisation) are projected to be about $1.43 billion this year and $1.85 billion in 2023. So debt payments will consume a huge chunk of Twitter’s cash.
Homeowners underwater on a big mortgage and related interest payments will be able to sympathise with the financial corner in which Musk may be putting Twitter.
Musk is going to have about $1 billion in interest payments to make, too, and if Tesla’s shares hit rough waters he could get squeezed, but let’s leave his wallet out of the mix for now. Twitter itself is going to have to churn at full throttle to earn the kind of money it needs to be both profitable and self-sufficient.
So there’s going to be pressure on Musk to make the financials work. He is said to have grand plans for doing that, which thus far seems to amount to an undisclosed deck he recently showed his backers. But he also said he isn’t interested in Twitter for economic reasons, which gave some potential financiers pause.
The deal “wouldn’t make much sense to most private equity investors,” according to Bloomberg.
But Musk swayed Morgan Stanley, Bank of America Corp., Barclays Plc and other big players, in part because of what of what is being described as his “enthusiasm for the deal.” Enthusiasm only gets you so far, but big institutions such as Morgan Stanley have presumably done their due diligence.
Or perhaps they also want to stay in Musk’s good graces so they can be well-positioned to get deal flow from Tesla? Maybe a bit of both? Time will tell. Investors expressed some optimism, lifting the stock price more than 3% on Monday, though it is still below the $54.20-a-share offer price.
Not enough details
Musk still hasn’t provided meaningful details about what, exactly, he will do to rev up Twitter’s engines. He has been an effective and bold leader at Tesla — but Tesla makes electric vehicles; it’s not a media company. Managerial prowess often doesn’t translate across different types of businesses.
And media companies have found the digital era challenging, with advertising evaporating or finding new channels and subscription revenue difficult to corral.
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 evolves and provide forums for ideas.
Musk has used social media to play games with his business interests, troll those he doesn’t like and run afoul of the law and regulators. None of that is a recipe for enlightened media management.
As we’ve also learnt from Facebook’s and Twitter’s myriad travails monitoring propaganda and disinformation, social media companies need to do a better job of vetting the information on their platforms. Musk shows no sign of being up to that task.
Yes, it’s compelling to watch Musk do his thing and interesting (and often disturbing) to see how much he breaks along the way, but media companies matter. They shape public dialogue and private conversations. And the price of delinquency is greater than $44 billion.
Timothy L. O’Brien is a senior columnist, who specialises in tech and business