Elon Musk and Twitter deal is a huge story with a lot of fast-moving parts to it. From negotiating to terminating the deal, here is everything you need to know about the deal.
Valuation in a nutshell
The EBITDA purchase multiple is above 50x, while other social media and networking companies are trading at about 28x. The cashflows of Twitter cannot cover the interest (excluding the principle repayments) on the $25 billion of transaction debt, which is 16x EBITDA. Revenue forecast from Capital IQ consensus was $1.3 billion. More financial details can be found here.
Why does Elon Musk want to buy Twitter
Free Speech, as he claimed --“Free speech is essential to a functioning democracy”.
Musk tweeted a poll to his followers in March that asked whether users believed Twitter was protecting free speech. He followed up that the poll results, in which around 70% of 2 million respondents answered "no," would be "very important." Then he made an offer to buy Twitter, noting that he believed Twitter needed to be private to accomplish his goal. He wants Twitter to adhere more closely to the principles of free speech, which, in a statement, Musk called “the bedrock of a functioning democracy.”
Starting in January 2022, Musk began to purchase Twitter's stock. By March, around 5% of Twitter’s outstanding shares were bought without disclosure. With that substantial position, SEC regulation required Musk to disclose the position no later than March 24. Musk failed to disclose and instead continued to accumulate Twitter's stock. By April 1, Musk had purchased nearly 9.1% of the company’s shares.
Meanwhile, Musk had spoken with two Twitter directors on Mar 26 regarding his joining of the Twitter board. Soon after, Musk signed an agreement to join the board but then changed his mind and pulled out of the agreement. Instead, he sent Twitter a take-it-or-leave-it unsolicited offer to buy the company for $54.20 per share in cash at around a 38% premium to its closing price on April 1. Initially, it seemed like Twitter was going to turn down the offer. The company had adopted a defensive strategy, shareholders’ right plan often known as the Poison Pill(*) a day after Musk offered to buy the company.
“Under the new structure, if any person or group acquires beneficial ownership of at least 15% of Twitter’s outstanding common stock without the board’s approval, other shareholders will be allowed to purchase additional shares at a discount. The plan is set to expire on April 14, 2023.”
Poison Pill is a common way to defend potential hostile takeover. Such a defense strategy is to dilute the bidder's interest, and the cost of the bid would rise substantially in order to make them look less attractive to the potential acquirer.
Musk then tweeted “Love Me Tender.”, a post implying a tender offer(**) will be launched if the board didn't sell. With a decent premium to market price, the board was supposed to act in the best interest of Twitter and its shareholders. The board started to take it more seriously when Musk offered details about how he would finance the deal. So Twitter’s board signed the merger agreement on April 25.
Tender offer is a type of hostile takeover in which the potential buyer issues a tender offer to purchase the share of another company at a premium above the current market value.
On July 8, Elon Musk notified Twitter that he was walking away from an agreed $44 billion takeover. Musk claimed that it was because the “average of false or spam accounts” represents more than 20% of the mDAU as opposed to the 5%that Twitter claimed after Musk demanded more information. mDAU is the “monetizable daily active users”, a non-GAAP metric Twitter uses to measure the people that use the platform. Twitter is now suing Musk and trying to force him to buy the company at the agreed $54.20 per Twitter share.
Some critics pointed out that Musk was well aware of the fake account issue when he signed the merger agreement as spam was one of the main reasons Musk cited, publicly and privately, for wanting to buy the company. Some say that the true reason Musk walked away from the deal is that the downturn of the stock market had made the agreement materialize.
Musk sold 9.8 million shares of Tesla to finance the deal at $822.68 per share, while the price before signing is $1,005 per share.
What happens next
Twitter chair board Bet Taylor said that Twitter is still committed to closing the deal on the price and terms agreed and Twitter has taken legal action to enforce the merger agreement. The court date is now set for October with a $1 billion potential termination fee.