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. … Read the rest