Free Bird
Elon Musk has done it! He is now the proud owner of Twitter, the captain of a shining beacon of social goodwill and business acumen. He will undoubtedly make himself and his many loyal investors billions and billions of dollars and change the world.
That is the message Musk would like to project. For a man who’s shown impressive business chops building electric cars and rockets, it would seem that such exceptionalism should translate to running a social media company who has drastically underperformed over the last decade, right? He shot people into space and brought them back to earth safely; managing a micro-blogging platform should be a piece of cake!
But Elon, building cars and rockets is not the same as moderating people’s opinions. And moderating people is hard.
Anyone who’s followed this months-long drama could probably see that this deal was never going to end well for Musk. Since his original offer to buy Twitter at $54.20 per share in April, Twitter’s stock did this:
With the public markets declining, Twitter’s value dropped somewhere between 15%-35%, shedding approximately a third of its value. Faced with the reality that his original offer was now severely overpriced, Musk began trying to weasel his way out of the deal.
But something curious happened. Musk tried to back out; but the Twitter board, along with an impending court date in Delaware Chancery Court that would have almost certainly sided with Twitter, forced Musk to consummate the deal at its original offer price.
The timing of this deal is not a coincidence. Purchasing Twitter was less a shrewd business endeavor and more a shameless reprieve from legal scrutiny. It’s common knowledge that Musk was scheduled for deposition in early October as both Musk and Twitter prepared for litigation. This deposition would have likely unveiled some of the more um, unsavory details of Musk’s life. Already, personal text messages between Musk and his many sycophants had leaked. It’s certain that many other details about Musk’s personal and professional life would have come out, forever enshrined in legal court documents.
Conveniently, Musk changed his mind a few days after the scheduled depositions, deciding to follow through on his original offer and dropping all pretense of his inability to come up with the funds. It turns out that for the world’s wealthiest man, the threat of public shaming can really help conjure up $44 billion. Who knew?
Crunch the Numbers
The purchase price of $44 billion sounds like one of those made up numbers, you know? Like seventeen gajillion. It’s an inconceivably big number for us common folk who just work a nine-to-five and look forward to watching Hulu at night. We don’t dream of such things.
Elon Musk does not have $44 billion, technically. Technically, he has some amount of money in his bank account (probably pretty large, but not $44 billion), along with a bunch of legal documents that give him claim to other instruments that could be worth $44 billion. His largest assets are his stock certificates to about 17% of Tesla shares, which only translate to real dollars if/when he chooses to sell those shares on the public market. He is also the CEO of SpaceX and The Boring Company, which are private companies. That ownership is less liquid than publicly traded companies; but he could take out other financial instruments, such as loans collateralized against his shares, to access real dollars.
This is a long way of saying Musk is worth a lot of money theoretically. But practically, he doesn’t have $44 billion just laying around. So how did he fund his latest splurge?
The short answer is Musk tapped some of his wealthy friends to pay for part of Twitter, then sold a lot of Tesla shares to cover the remaining balance. Let’s break this down:
Musk’s wealthy friends - this is a combination of banks (Morgan Stanley, Bank of America) committing debt financing and other financing from contacts such as Oracle founder Larry Ellison or Saudi Prince Alwaleed bin Talal. These aren’t avenues that just anyone gets to access; and this is where nepotism really pays. Everyone involved knows that this deal financially doesn’t make sense, but they went along anyway just to rub shoulders with Musk. Yay, I guess?
Selling Tesla shares - this is probably not smart, but I’m not Elon Musk so what do I know? Tesla is the fountain of wealth that propels Musk’s overall worth. Now he’s sold significant amounts of Tesla to fund an overpriced vanity project that will take years to (maybe) make a return. This is the equivalent of selling caviar to buy peanuts. It’s only a good deal if you really love peanuts.
Chief Twit
So why did Musk, a man who didn’t even want to buy Twitter, buy a company that by all accounts, didn’t want to be bought by Musk? Musk had backed out of the deal. Twitter - its board, its CEO, its legal team, anyone - could have just simply said, “Ok no big deal. We’ll each go our separate way.” And that would have been the end of it.
But money makes people do stupid things, even if they seem really smart. Twitter is a legal entity; by itself, it does not exist. What gives it um, existence are the people who run it, namely the board and its executive suite. And people are fickle, anxious, prideful creatures.
Twitter’s board has one goal: to maximize firm value. If there is a product release or an advertiser campaign that could move the needle on the company’s revenues, the board should make whatever decisions are needed to unlock that value. By extension, the CEO, Parag Agrawal, should operate towards the same overall goal. This is why they agreed to sell the company at $54.20 per share - it was a high point the company had not seen in a while (and likely a price point they did not forecast to hit in the near future). They sold high; they did their job.
Now that he’s bought the company, Musk has fired its top executives and is refusing to pay their severance packages:
Mr. Musk also appears unlikely to pay the golden parachutes that the fired top executives of Twitter were set to receive. Under the merger agreement, those executives — including Parag Agrawal, the chief executive — had been set to receive compensation of $20 million to $60 million if they were fired. But Mr. Musk terminated the executives “for cause,” meaning he did it because he alleged he had justification, which may void that agreement, two people with knowledge of the matter said.
This is where the real contention lies. For someone like Agrawal, being Twitter’s CEO was probably a good gig - he could make decisions, not report to people like Musk, and get paid handsomely for it. He also had a golden parachute clause in his employment agreement that would pay him if 1) Twitter changes ownership, and 2) he is fired. Matt Levine wrote about the psychology of golden parachutes:
Here, the golden parachutes worked perfectly. Agrawal and his management team clearly did not like Musk or want him to buy the company, and they clearly knew he would fire them, but they negotiated a deal with him anyway, because it was in the best interests of shareholders. They put shareholder value above their own careers and interests, perhaps because they are noble people who love shareholder value, but perhaps also because they stood to get huge bags of money as a reward for this sacrifice.
This is the crux of the Musk-Twitter deal: Musk continuously thinks he can flout the law and eschew contract terms. He thinks he is above the system. Did Twitter knowingly misstate spam account data in an effort to obfuscate the truth and extract a higher selling price from Musk? No, they didn’t. And Musk knew it. And the Delaware Chancery Court knew it too. That is why Musk honored the terms of the original purchase agreement.
Did Twitter’s fired executives do anything that would constitute “cause” for termination? I highly doubt it; if they had, they likely would have been fired by Twitter long before Musk. This is Musk tugging on the same thread again - if he can consummate a deal per its agreed upon terms, then he can… consummate the deal per all of its agreed upon terms, including the termination clauses that are built in exactly for this purpose.
The great irony to this whole deal is that as the world’s wealthiest person, Musk relies on the infallibility of the law more than anyone. As previously stated, he likely does not hoard piles of cash at home. He trusts in the systems of law and corporate governance that entitle him to shares of Tesla that in turn, can be sold in markets constructed on legally binding terms; he trusts that Bank of America will honor its debt agreement and commit the funds; he trusts that when the Saudi Prince signs a piece of paper and pledges $2 billion, he won’t turn around and sue Musk for some ticky tacky shit. Words matter. Actions matter. Get with the program, Elon.
Admiring my bank account balance,
A