What’s the easiest way to buy something? With other people’s money. That is the main point of the Leveraged Buyouts that have dominated mergers and acquisitions for a generation. Elon Musk’s planned takeover has undergone many twists, but the billionaire head of Tesla Inc. is now once again moving forward with the acquisition, which could beclosed by the end of October.
How did the Twitter-Musk saga begin?
The earliest contact between Elon Reeve Musk and Twitter occurred on 4th April 2022, when the business magnate revealed the acquisition of a 9.2% stake in Twitter. At that period, the 2.89 billion purchases appeared to make Mr. Musk Twitter’s largest shareholder, ahead of the mutual-fund company Vanguard with its 8.8%.
The news immediately caught the attention of the media, sparking much controversy for the future of the company.
"I invested in Twitter because I believe in its potential to become the platform for free speech around the world, and I believe that free speech is a social imperative for a functioning democracy."
These were the words used by “Tesla” and “Space X” CEO in a letter addressed to the president of Twitter, Bret Taylor. By this, he wanted to motivate a second purchase attempt aimed at making him the sole shareholder of the social media company, by an effort of 43 billion dollars, paying 54,20 dollars per stock.
After a brief period, Elon Musk withdrew his offer, claiming a violation of contractual terms related to the declaration of the number of fake accounts on the social network. According to the contract, these accounts should have been less than 5% of the platform’s active ones, but Twitter was accused of failing to provide such information.
Because of Musk's retirement, Twitter's leaders have announced their intention to take legal action to finalize the agreement according to the established terms. This caused a strong decrease in the Twitter stocks value during the following days. Afterwards, Elon Musk took a counterattack and filed a lawsuit against Twitter after the social media denounced him for the withdrawal from the $44 billion takeover bid. The Reuters agency reports that the lawsuit of Tesla's patron has not been published yet, therefore the details are still not known.
Nevertheless, the Twitter-Musk saga did not stop and began to take an unexpected turn. On Monday 12th September, Reuters and the Wall Street Journal reported that Twitter shareholders had formally accepted the $44 billion offer made by Elon Musk. But the latter declared that he no longer wanted to consider the affair.
2) What is going on now?
Elon Musk changed his mind…again: he is now ready to buy Twitter for $44 billion. The Tesla patron has decided to re-submit his offer to buy the social media company for $54.20 per share. That is the same figure as the first proposal in April, which was later scrapped with a lot of legal controversies. Some might wonder why Tesla’s CEO reconsidered the acquisition. In this respect, some journalists pointed out that the cost of borrowing money is ticking steadily higher, as the Federal Reserve and central banks worldwide attempt to constrain the soaring inflation. If Musk lost at trial, the judge could not only force him to close the deal but also impose interest payments that would make Twitter even more expensive for Musk.
It is not yet clear whether Twitter has accepted the American billionaire's offer. Meanwhile, the Delaware court accepted Elon Musk’s request for suspension of the lawsuit, allowing the parties to reach an agreement within 28th October.
Alluding to the latest offer, Musk’s lawyers wrote: "There is no need for an expedited trial to order the defendants to do what they are already doing, and this action is now superfluous."
According to Bloomberg news agency, negotiations between Twitter and Elon Musk are reportedly stuck on the financing of the deal and, in particular, on the $13 billion that the Tesla CEO said he would receive in debt financing, using the leveraged buyout mechanism.
3. What is a leveraged buyout?
LBOs are acquisitions where debt plays a crucial role. The basic idea is to acquire a total or majority interest in a target company while substantially limiting the initial investment by the buyer. In the context of an LBO, a company can be acquired by means of borrowing an often high amount of liquid assets (bonds or loans) to cover the acquisition cost. The buyout is therefore financed by debt. To arrange a Leveraged Buy-Out, the buyer or group of buyers creates a holding company that borrows funds to finance the buy-out. Thanks to the loan, plus its capital, the buyers can acquire 100% of the target company: the buyout is complete.
The company making the acquisition by means of an LBO, which is generally a private equity firm, uses its assets as financial leverage. The assets and cash flows of the company bought out (called target company or vendor) are also used as security and employed to pay the financing cost. The transaction will be successful once the holding company has fully repaid the loan and merges with the target company. It is therefore vital to ensure in advance that the target will generate more profit than the cost of the loan.
LBOs limit the drawback for the buyer: if things go wrong, the vehicle company goes bankrupt, not the buyer. LBOs also increase the buyers’ upside, because they can acquire bigger companies that they, otherwise, could not afford.
The chart below could be useful for a better understanding of the mechanism.
Musk is playing the role of the private equity firm in Twitter’s leveraged buyout. He is on the hook to supply about $33.5 billion in equity, with the rest coming from a debt package given by big Wall Street banks that have committed to lend $13 billion to Twitter to carry out its side of the deal.
4. Why would Elon Musk take out a giant loan to buy Twitter?
According to Forbes, Elon Musk is the richest man in the world with its wealth of more than $230 billion. So why didn’t he use part of it instead of debt?
First of all, even the richest man in the world does not have $44 billion in his bank account. In fact, most of his wealth is tied up in Tesla shares that he cannot sell overnight.
Secondly, when you are the richest person on the planet and plan to acquire an established company, even if not super profitable, you are likely to get good debt conditions.
In this regard, the debt was underwritten by seven banks, headed by Morgan Stanley, which are responsible for providing cash. After funding the debt, banks could potentially syndicate the bonds and loans to investors. In fact, as is normal in LBOs, the intention of banks was, then, to sell the risk to external investors in the form of longer-term financial products. However, credit conditions have worsened since April due to several factors, such as inflation. Thus, banks will undoubtedly make a loss on some portion of any sale. According to some researches, there is a risk of at least 500 million losses for credit institutions that agreed to finance the takeover.
5. Which are the main risks associated with a monopolization of such a crucial information channel?
A question arises spontaneously: “What will the new Twitter look like after Elon Musk’s takeover?”.
It is not a secret that he intends to make Twitter a platform where freedom of expression will be fully protected. According to him: "Freedom of expression is the stronghold for a functioning democracy and Twitter is the digital town square where issues vital to the future of humanity are debated.”
The main problem is to understand who is entitled to manage the freedom of expression of people. During these years, on many occasions, the platform in question banned tweets and accounts that could be considered as dangerous for public order or for the integrity of the information, as happened to Donald Trump’s account after the Capitol Hill attack.
A solution to this issue could be to find a way through which the “social world” and the statal authority can collaborate, as TikTok did in cooperating with the Italian judicial authority to find the authors of a particularly risky challenge.
Could we expect Musk to open dialogue with the authorities for safer use of the social network?
As his statements suggest, he is trying to turn back the clock to a time when digital liberalism was at its best. Well, this social media model conflicts with the new season of digital constitutionalism, especially the European one, in which the EU’s institutions are working to adopt co-regulatory models in which platforms are incentivized to take action to remove contents that violate their policy.
However, Elon Musk does not want the platform to intervene in removing offensive, highly informative and hateful statements as this would mean restricting the right of expression, which is protected by the First Amendment of the American Constitution.
Is it fair to let the role and direction of the web depend solely on the intentions and cultural background of those who control it, or do you think the public authority should intervene more in this regard?
BIBLIOGRAPHY:
Paula Seligson, “Elon Musk’s Twitter Deal Is Different Than Most LBOs, Here’s How”, The Washington Post, October 7, 2022.
“Twitter, Musk contrattacca e fa causa al social network”, Sole 24 Ore, July 30, 2022.
Valentina Fiorenza, “Twitter, social e libertà d’espressione: cosa ci sfugge”.
Giusella Finocchiaro e Oreste Pollicino, “Elon Musk, Twitter e i rischi del liberismo digitale”, Sole 24 Ore.
“Explainer, Elon Musk Twitter turnaround reflects legal challenges”, The Economic Times, October 5, 2022.
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