29 July 2022
Of course we’re going to talk about Twitter, everybody seems to want to talk about Twitter. Over the last couple of years, just about the best thing that could have happened to a public company (or a cryptocurrency) has been to have Elon Musk tweet something positive about it. This is a phenomenon that Matt Levine at Bloomberg has called the Elon Markets Hypothesis, according to which “The way finance works now is that things are valuable not based on their cash flows but on their proximity to Elon Musk”. This is not as silly as it sounds: there are clearly people who operate on the principle that “did Elon Musk tweet about a thing?” is a simpler valuation metric than, say, estimating cashflows in perpetuity and applying an appropriate discount rate; and, you know, some of those people have pretty impressive track records.
However, not everyone in finance is necessarily interested in buying weekly out-of-the-money calls on Tesla or doing the DOGE/SHIB relative-value trade. There is one company that Elon really seems to care about that is being run by people who are a bit too finance-y: Twitter. And, interestingly, the Elon Markets Hypothesis almost didn’t work for Twitter. When Elon announced his takeover bid, the board didn’t like it (they issued a poison pill), investors didn’t believe it (the stock actually dropped on the day of the announcement), and generally many people yawned. Maybe it is precisely this collective scepticism that goaded Musk to show he was serious, and his eventual success must have emboldened him because a few days after his bid was accepted he started tweeting about also buying Coca-Cola so that he could change the recipe. One way or another, the back story of why he actually bid for Twitter might never fully be known (and we are writing this before the publication of the proxy materials), so what we’re about to engage in here is pure 100% speculation, but let’s do it anyway because it’s fun.
The first thing to keep in mind is that Elon Musk is buddies with Jack Dorsey, the founder and now-ousted CEO of Twitter. Jack Dorsey is fond of saying things like “twitter was not founded, it was discovered”; and (after elon announced his bid) “twitter as a company has always been my sole issue and biggest regret. it has been owned by wall street and the ad model. taking it back from wall street is the correct first step”; and “in principle, i don’t believe anyone should own or run twitter. it wants to be a public good at a protocol level, not a company”; and “twitter is the closest thing we have to a global consciousness”. So Jack Dorsey might have aspirations to be a decent human, but he did not appear to us to have too much interest in making Twitter profitable, which is perhaps why Twitter never was, and why Dorsey ultimately was ousted when Elliott Management and Silver Lake came onboard as activists in early 2020.
That event could have marked a turning point, the beginning of a process that would close the gap between Twitter’s low market value and its enormous impact on and utility to society. There were other encouraging signs: over the previous three years Twitter had been investing in its technology infrastructure, a process that had now finished and was enabling visibly faster product innovation; and the company had just generally cleaned up its act by becoming more inclusive, less offensive and less ‘troll-y’. Things looked promising. But Twitter never developed (or it didn’t get the time to develop) a holistic vision of its ideal positioning as a business, and instead continued to chase advertising revenues, a game in which it was inferior to its larger competitors, like Alphabet and Meta. Perhaps this lack of strategic inspiration is understandable: the new CEO Parag Agrawal, who took over five months ago after Dorsey left, was picked by Dorsey, and Twitter’s board of directors stands out amid tech companies for owning relatively little of the business’s stock and not even using the company’s product all that much. It is this lack of strategic vision and shareholder buy-in that left the door open for Musk, who has pulled off something that would have been unimaginable at just about any other of the well-known tech companies.
Soon after the bid, the conspiracy theories began. Elon Musk was supposedly buying Twitter because of “free speech”, but he has been criticised for blocking journalists who wrote negative things against him, doxing Tesla short-sellers, and using his position to harass whistle-blowers and critics – such as directing abuse at Vijaya Gadde, Twitter’s content moderation lawyer. If free speech is what we’re after, it’s debatable whether Elon’s version is the desirable one; and besides, it was Jack Dorsey who kicked Trump off the platform, not current management. Musk has been allowed to say and do things on Twitter that he wouldn’t have been on any other forum.
Another possibility is simply that Musk is instead buying Twitter because Jack Dorsey wants him to, a gift that would take the concept of ‘bromance’ to a whole new level. There are some who believe that Dorsey has been hatching this plan ever since he left Twitter, because he maintains that the “world’s town square” should not be run for profit. We sympathise with this idea, but other than the fact that Jack Dorsey’s version of sticking it to Wall Street appears to involve paying Morgan Stanley to lead one of the largest leveraged buyouts in history, this kind of deal introduces another issue: interest costs. The debt that Twitter would take on as part of Musk’s takeover (a junk bond plus a leveraged loan) would cost it about US$1 billion annually in interest, a figure which the company has never earned – not even close. This explains why many believe that job cuts at the company are a near-certainty should Musk take over. But then the next question should be how Twitter would afford a US$1bn interest bill without investing in its product and after having fired the employees that have made the platform welcoming and decent enough for advertisers to use.
The deal came together very quickly, and Musk waived his right to due diligence in order to make it happen (which would ordinarily be weird but this is Elon Musk), and perhaps the lending banks only went along with it because Musk himself put up US$33 billion of cash ahead of them (US$21 billion from his own resources and US$12.5 billion from a margin loan on US$62.5billion of his Tesla stock). Having the richest person in the world on the hook for US$33bn ahead of your junk bond seems like a decent assurance, and perhaps enough to make you stop asking too many questions about the US$1 billion interest bill. Plus, it’s not like the banks will be hanging on to that debt for very long…
Still, the economics of the bid were hard to square. There were other, less charitable and more reductionist ‘hot takes’ about what is going on, ranging from the suggestion that Musk is buying Twitter as an excuse to sell his overvalued Tesla stock without panicking Tesla fans (like he recently did by running a Twitter poll on whether he should sell some to “test liquidity”), to even less charitable speculation about his mental state. The fact that such theories have been promulgated probably says more about how crazy finance has become in the 2020s than anything else.
The reasons for shareholders to accept this deal (should it take place, and there’s considerable doubt about that at the time of writing) are many: first of all, investor confidence in Twitter’s management and board has been waning for some time, and the meek way they changed their minds from absolute defensiveness to unanimous recommendation for the deal in the space of a few days does nothing but reinforce this view; secondly, most other tech stocks aren’t doing so well these days, and this bid bails Twitter shareholders out of what would otherwise be a much lower stock price (thanks, I guess…); thirdly, Twitter’s advisers have issued their opinion that apparently US$54.20 per share is a fair valuation for the business, despite the fact that it’s plucked from a weed joke; and finally, for shareholders, fighting it would be an aggravation.
There are also two reasons not to accept. The financial reason is some version of ‘a better management team/board would have done better with this company’, and even with the current team in charge Twitter’s Q1 2022 results were actually decent (Q2 was less impressive, which it pinned partly on Musk-induced uncertainty). The second reason is social: as a venue for public conversation, Twitter is arguably too important to be owned by someone as controversial as Elon Musk. There is a good chance that the Elon Markets Hypothesis was temporary – both a product and enabling force of the low-interest rate meme-stock fuelled mania that at times powered equity markets over the last couple of years. Maybe Elon saw this glorious era coming to a close and didn’t want it to end? Either way, this tale isn’t over yet.
The value of investments, and any income generated from them, can fall as well as rise.