Twitter has accepted billionaire Elon Musk’s $44 billion takeover bid, the company announced on Monday.
Musk will pay $54.20 per share for Twitter. That’s a 38% premium to the stock’s closing price the day before Musk revealed he had bought a 9% stake in the company. Perhaps more importantly, it’s a 53% premium to where the shares were trading in late February, before Musk started building up his stake.
When the transaction closes, likely later this year, Twitter will become a private company, 100% owned by Musk. Musk walks away with full control of the social media company, and shareholders walk away with $54.20 per share.
Twitter’s board decision to accept Musk’s $54.20 offer came as a surprise to many. Initially, the board pushed back against Musk, adopting a poison pill that would have made a hostile takeover impossible. Some Wall Street analysts said the offer was too low despite the high premium, in part because the shares traded as low as $73 in August.
There were also many doubts about whether Musk could fund his bid. He is believed to be the richest man in the world, with a net worth of around $300 billion. Much of this, however, is not liquid. Most of his wealth consists of shares in Tesla and stakes in his other companies. Selling tens of billions of Tesla shares to buy Twitter could alienate or anger the automaker’s investors.
This view most likely underestimated one of Musk’s finest abilities: getting funding. Investors around the world are eager to invest in Musk’s projects and bankers are eager to arrange the deals. Just last week, Musk’s Boring Company, which aims to eliminate traffic by digging high-speed underground tunnels, raised $675 million at a valuation of $5.675 billion. Crunchbase reports that the company has raised a total of $900 million. Musk’s other company, Space X, raised $1.5 billion last year and is believed to be the third most valuable private company, with a valuation of $100 billion, after two Chinese companies, the owner of TikTok Shanghai-based Byte Dance, and Hangzhou-based Ant Group.
As we explained on April 14, “[I]It is obvious that Musk can raise funds to achieve this. Tesla’s valuation alone gives it almost unlimited purchasing power.
It was therefore not so surprising that the banks lined up to fund his bid, led by Morgan Stanley. Most of the banks providing $25.5 billion in funding even accepted Musk’s penchant for digital jokes by signing commitment letters on April 20 or 4/20. Musk himself will provide $21 billion of his own money and repay $12.5 billion of that loan with Tesla stock. The rest of the debt will be secured by the assets of Twitter itself. Banks therefore provide $25.5 billion, but only $13 billion is at risk on Twitter. That’s a loan-to-value ratio of 20%, which means the banks aren’t going into much debt and wouldn’t lose more unless Musk loses around $33 billion.
By the way, while no one else has come forward to invest alongside Musk, now that he has Twitter board approval for the deal, he might be able to find some other equity investors. This is no longer a hostile takeover situation. It’s a signed and sealed deal that could put a private equity or sovereign investor on Musk’s side. If Musk can raise $900 million to tunnel, he can probably find a few investors to pump in a billion or two for Twitter.
Funding was the masterstroke that forced the board’s hand. With the money in place, the council had an obligation to take the offer seriously. No other bidders had come forward in the past three weeks or so since it became clear that Twitter was in play. Additionally, the rest of the market had become very volatile. Watching Netflix stocks plunge and drag Disney down may have rattled the board members. Shares of Facebook’s Meta are down 44% year-to-date. The same goes for Pinterest shares. Snap shares are down 34%. It was undoubtedly difficult for management to convince the board that it had a path to a higher share price than what Musk was offering, especially since Musk’s departure would almost certainly return the shares at least where they were before his involvement.
Think of it this way. This high Twitter valuation from last summer came at a time when “stay at home” stocks were soaring. With Disney shares nearing $190, a $75 price tag for Twitter doesn’t seem unreasonable. With Disney at $120 per share, that kind of valuation for Twitter seems crazy.
We’ll find out on Thursday if the company’s latest quarterly results played a role. On Wall Street, many assume that the company will not only report a bad quarter, but also a lower-than-expected forecast for the year ahead. That would certainly have prompted the board to accept Musk’s offer. Wedbush analyst Dan Ives said Twitter’s revenue “likely won’t be rainbows and smiles, putting further pressure on the business around this high-stakes poker game. with Musk’s looming offer.”
For Musk, on the other hand, it was rocketsstars and hearts, as he tweeted outside:
Ὠ💫♥️ Yesss!!! ♥️💫Ὠ pic.twitter.com/0T9HzUHuh6
— Elon Musk (@elonmusk) April 25, 2022