Musk made a comeback three years ago after tweeting that he had privatized Tesla at $420 a share TSLA.US without success, this time targeting the social media platform TWTR.US.
Interestingly, in response to Musk's all-out takeover proposal of $54.20 per share, Twitter's board of directors quickly introduced a countermeasure: issuing a stock option to shareholders of record on April 25, 2022, at an exercise price of $210, which was exactly half of Musk's bid of $420 that year to propose to privatize Tesla — I don't know if it was a "warm reminder" to Musk.
$210 is 4.3 times Twitter's current price of $48.45, and no shareholder would exercise their rights at such a high price, which is exactly what Poison Pill is all about — to trigger defenses when it's acquired in a hostile takeover.
According to Twitter's announcement, if the acquirer holds 15% or more of Twitter's common stock, the above-mentioned holders can buy shares with a market price equivalent to twice the exercise price; if the acquirer acquires 15% or more of the common shares, the company merges with other companies or acquiring entities, or sells or transfers more than half of the assets, cash flows or beneficial rights, the holder can acquire shares of the above retained entities equivalent to twice the market price of the exercise price.
All in all, the arrangement of Twitter's board of directors will greatly increase the difficulty of Musk's privatization of Twitter.
Twitter said in the announcement that the board aims to use the agreement to protect shareholders from forced or unfair takeover strategies. Put simply, impose hefty fines on individuals or groups that acquire 15% or more of Twitter's common stock without board approval in order to substantially increase the capital or difficulty required for a full-blown takeover.
Twitter's board stressed that the plan would not interfere with any mergers, bids or deals or other business combinations approved by the board (in the interest of shareholders).
Musk's full acquisition of Twitter is premeditated?
Earlier this month, Twitter announced that Musk already holds 73.115 million shares of Twitter, or 9.1% of the number of shares outstanding, and will be appointed to the board of directors for a term of office until 2024. As long as Musk serves on the board, he cannot hold more than 14.9% interest in Twitter.
The author bought it in "[The Power of Capital]" without a word! Why does Musk look at Twitter? As mentioned in the article, Musk has become the largest shareholder of Twitter.
Subsequently, Twitter CEO tweeted that he had received a letter from Musk that he had no intention of entering the board, and Musk was grumpy about Twitter's reforms, which may suggest that 1) Musk is not satisfied with the 14.9% equity limit; 2) Musk still wants to use his shareholder status to push the social platform in the direction he wants.
Combined with Musk's love of being in the spotlight, it's not hard to understand his motivation to take over Twitter across the board.
Musk vs. Twitter's board battle: who moved whose cheese
Musk said in public that after the full acquisition, Twitter will no longer have a board of directors, saving about $3 million a year.
From Twitter's full-year financial data, I noted that twitter's board members' full-year compensation for 2021 totalled $2.904 million (combined cash and shares), which is only 0.4% of the company's adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the full year 2021.
The removal of the board of directors is not very effective for Twitter's profitability improvement. So what is Musk privatizing for?
In a letter sent to the chairman of Twitter's board, Musk said: "Twitter has amazing potential. I'll unlock it. ”
Of course, for musk, who is rich and willful, unlocking all kinds of "freedoms" is really freedom. From the tweets, it can be seen that Musk's expectation for Twitter is to let him speak freely, really play the characteristics of social media, and meet the "freedom" he wants to speak.
But such "freedom" may not allow shareholders to be "wealth free.".
Twitter's main revenue streams are advertising revenue and digital licensing business, of which advertising revenue accounts for 88.74% of its full-year 2021 revenue, which is in line with the monetization model of other social platform operators - using the suction effect of social media to advertise for brands and advertisers, earning advertising and marketing revenue.
As of the end of 2021, the company's gross margin is 64.60%, compared to another social platform Facebook's parent company Meta (FB. US) compared to that, there is still a 16 percentage point gap. That's because Twitter's revenue base is still low enough to create a scale effect like Meta.
Twitter has a $682 million adjusted EBITDA of 217 million daily active users, Meta with 2.82 billion daily actives has a adjusted EBITDA of $54.72 billion, and Snap, which has 319 million daily active users, has an adjusted EBITDA of $617 million. It can be seen that the user scale reaches billions of Meta, and the scale benefit is far from Twitter and Snap a few streets.
So can Musk's advocacy of handing over control to users form a scale that Meta has been operating for years with expansion and acquisitions? Maybe, but I don't think that necessarily translates into revenue.
Users sell their accounts for Musk's freedom, but regulators and advertisers do not sell their accounts, after all, this involves governance issues and the latter's brand image, once there is a deviation, the cost of advertisers' public relations crisis cannot be compensated by traffic benefits.
Musk and Zuckerberg both want to become opinion leaders on social media for a reason, which can hijack the direction of speech and even change the direction of politics and economics, and the value generated by them is immeasurable, but from the perspective of the regulatory level, it is a major security risk, the possibility of perfection is a tiger, and it is only a show of hands to suppress it, once the pressure is exerted, the foothold of these large social platforms will be gone.
Therefore, from the perspective of shareholders, Musk is a hostile acquirer whose value objectives are not consistent with theirs, and the possibility of damage to the value of his investment is relatively high. Under this premise, the poison pill policy of the board of directors is in the interest of shareholders. It can be seen that Musk's privatization has not only moved the cheese of board members, but also the interests of existing shareholders.
Who can gain from the clams fighting?
Musk's full-fledged bid for Twitter was $54.20 per share in cash, representing a 54 percent premium to the bid price of his initial investment in Twitter and a 38 percent premium to the share price after his investment was announced.
Based on this bid, Musk may also need to prepare at least $37.6 billion to acquire the remaining shares.
This is not a problem for Musk, who is worth at least $200 billion, and his stake in Tesla alone is worth more than $170 billion, and he should personally have enough money to cope.
The problem now is that the price of privatization could be much higher than Musk's budget. One is because of the above poison pill clause, and the other reason is that the privatization price is a bit low, and the Saudi prince was the first to stand up against it.
The prince tweeted back against Musk, noting: "Given [Twitter's] growth prospects, I don't think Musk's bid ($54.20) reflects the intrinsic value of Twitter." See figure below. Prince holds a 5.2% interest in Twitter, which is valued at $2.15 billion.
If the price of the privatization is much higher than the budget, Musk may need to use external funds to make leveraged buyouts. Leveraged buyouts need to pay interest costs, musk may not care about interest, but his partners must measure whether the business can make money, how much money can be made before the next cost.
As of the end of 2021, Twitter's net cash and short-term investments totaled $6.394 billion, while interest-paying debt was $5.215 billion. Assuming Musk uses borrowed money to buy the remaining 90.9% interest and 8% interest cost, after deducting Twitter's net cash balance, leveraged buyouts may pay up to $2.9 billion in interest per year, even without the poison pill clause.
In 2021, Twitter's Adjusted EBITDA (Profit Before Interest, Taxes, Depreciation and Amortization) – which can be used to measure residual income from interest payments, is only $682 million, not enough to cover such a high interest expense.
In 2021, Twitter's adjusted EBITDA rate is 13.43%, while the author estimates that Meta's profit margin may reach 46.4%, and even Snap has 14.98%, which is obviously Not as good as its peers in generating operating cash flow. As analyzed earlier, if Musk's reform is not conducive to advertisers, Twitter's growth and profitability may not improve as desired, then in the end it will be a liability asset that cannot bear interest.
The investment bank that assists Musk certainly understands this layer of truth, and the profit is in their best interest, and they can also earn generous transaction fees and service fees, as well as win Musk's other transactions, the key is that Musk's assets are enough to repay the balance.
Musk is of course also a beneficiary, perhaps he is not using Twitter as a money-making tool, but a platform to vent his personal opinions, which is worth the price for him, Twitter's current stock price is similar to the price it listed eight years ago, even if Musk's premium bid of $54.20 is 33% from the all-time high of $80.75 in February 2021.
It can be inferred that as one of the shareholders, the prince's refusal is justified, because from the perspective of Twitter's stock price performance since its listing, based on Twitter's development potential, Musk's bid can not make people shine, and the poison pill of the board of directors is really protecting the rights and interests of shareholders, and can win greater benefits for themselves (indirectly raising the bid) when Musk acquires, making the transaction appear fairer.
Therefore, the "poison pill" move invisibly increases the bargaining power of minority shareholders. Musk's privatization proposal plus "poison pills" have released Twitter's market value while boosting shareholder equity and benefiting shareholders.
Musk mentioned in his letter to Twitter's chairman of the board that his bid was what he thought was the best and final price, and if it was not accepted, he would reconsider his status as a shareholder — there seems to be a meaning of not being a shareholder if the acquisition is not successful, which is likely to lead to a sharp decline in Twitter's stock price, which will undoubtedly increase the volatility of Twitter's stock price.
In summary, both shareholders and Musk may become the biggest beneficiaries of this transaction, but if the dispute consumes too much, affecting Twitter's normal operation, it may worsen Twitter's profit performance, which in turn will affect the interests of shareholders.
Author: Mao Ting