It’s been all anyone that lives on Twitter can talk about – that is, in between frank discussions of the continued social relevance of the Cheesecake Factory and the ongoing saga that is “Ye”—Elon Musk has now “acquired” Twitter. What does this mean for extremist voices? Naysayers of Tesla or The Boring Project? Or that Trump fella with the suspended account?
And what exactly does it mean that he is acquiring the publicly traded company?
Before we answer that question, it is worth first laying out the “why” – why did he want to acquire Twitter and thereby bring it private? To hear him tell it, he seeks to return Twitter to a former glory where, unencumbered by the vagaries of the market, it was free to flourish as a utopian free speech public square. He might still be angry about the fines he had to pay when he tweeted about his intention to take Tesla private (he never did, more on that in a minute) or the lawsuit he faced when he called a British caver a “pedo.” In sum, he wishes to free Twitter from influence by outside forces – other than his own, presumably.
That being the goal, Elon will front the money to buy Twitter and then he can set any rules he wants – right? Wrong. In order to finance the purchase he needed to undertake what is known as a leveraged buyout (“LBO”) which is not at all uncommon, but is somewhat antithetical to Musk’s stated purpose.
In an LBO, at least a portion of the purchase price is fronted by new debt held by the company itself. Think of it like walking up to a pet store and saying you’d like to buy the Golden Retriever in the window, and part of the bill should go on the dog’s tab. Like much of our financial system, when you lay it all out it sounds rather absurd, but it is a common method of securing financing for acquisition. The ceiling on how much of the bill the dog, or Twitter, can pay is how much debt service it can afford – that is, how big of a regular payment on debt the company can support with its current revenue. If reports on the financing mechanism are correct, Twitter will be taking on about $13 billion.
The rest of the tab for Twitter will be jointly shouldered by Musk himself and whatever deep pocket friends he can round up to kick in a couple of ducats. The total for the Musk wing of the acquisition comes to $33.5 billion, with at least $7.1 billion coming from finance friends – Prince Alwaleed bin Talal Al Saud, Larry Ellison, and the likes.
Early indications were that most of the rest of the price would be paid by margin loans on Musk’s interest in Tesla. In other words, Musk would put up his stock in Tesla as collateral to obtain loans, maybe for as much as $12.5 billion. In so staking his Tesla shares, would-be financiers want additional guarantees as to the value of Tesla. Certainly, you wouldn’t want to front billions to Elon on the promise that if he doesn’t pay his loan you can have his Tesla shares if he might then go and do something that plunges those shares in value. There were thus triggering mechanisms that accelerate or call-in the loan should Tesla drop below a certain threshold. Musk has since claimed that he has raised sufficient equity financing to take the Tesla shares out of the equation – but don’t be surprised if they make a return, just as the deal itself was deemed dead before being revived and, finally, culminated.
If the Tesla margin loan did return, it is difficult to see how Twitter can be said to be influenced from the market – its existence will be tethered to the continued profitability of Tesla, itself a publicly traded corporation. Anything that threatens Tesla, be it public relations, or quality control, or scandal, or Elon himself, would thus threaten Twitter.
If instead the equity financing holds and Musk was able to acquire Twitter using some of his assets and a lot of his friends’ assets, the insulation from outside forces is nonetheless rather thin. By way of explanation, an apt metaphor: let’s imagine instead of a metaphorical public square, we have an actual public square. It is currently owned by 1635 individuals, the same number that there are institutional shareholders in Twitter. These can be said to be those that carry direct influence over the public square. Tired of being chastised for washing your feet in the fountains and generally making a nuisance of yourselves, you and five to ten of your friends set out to acquire funding to purchase the public square. You are successful, and the transaction goes through.
The square continues to be open to the public but you and your dirty-footed friends are free to wash your toes as you see fit. When 1635 interests owned the square, it took considerable effort to assemble a sufficient number to make an actual change – so five foot dippers weren’t going to get anything done. Now, your reign is somewhat supreme.
Except it isn’t, because you each own outside interests. The square isn’t your only business, you’re bakers and shoemakers and people that do that thing where they crush wine grapes with their feet (hence the dirt). Instead of 1635 influence points there are now 5 fulcrums by which outside actors can gain leverage. The owner of the building that the bakery is housed in doesn’t like that children are allowed to play in the square, and he puts pressure on the baker to exert their influence to make a change.
So too with Twitter. Regardless of whether one believes Musk’s motivations to be on the side of the angels, privatizing Twitter will not attenuate market signals but intensify them. Investors in Tesla, whether or not a margin loan is in play, can lean on Musk to make changes to the platform that meet their needs and desires. The same goes for his equity investors. One of them, hypothetically of course, may be a billionaire 2020 election denier that would seek to amplify certain voices over others.
The fatal flaw in Musk’s vision of Twitter as public square is in his acquisition. The beauty of the square lies in it belonging to no-one and everyone. Twitter as a publicly traded company falls short of that ideal, to be sure, but concentrating ownership moves it further still.