In early April, Elon surprised the world when he announced that he had acquired a 9.2% stake in Twitter. At first, he played it cool and didn’t make it clear whether he wanted to buy the company or not.
Many speculated that Elon was just trying to join the Twitter board so that he could influence decisions at the company without taking over the entire company. The fact that Twitter capped his stake at 15% just made it even less likely that Elon would attempt a takeover. But, despite all that, it didn’t take long for Elon to make a buyout offer for $41.39 billion. And the board would eventually accept a bid for $44 billion.
Elon instantly went ahead and sold off his Tesla stock and secured billions of dollars worth of loans to pay for Twitter. All of this unfolded within a month, so it seemed like both Elon and Twitter wanted to get this deal done ASAP.
But, at this point, it’s been nearly 2 months since Elon secured funding for the Twitter deal, and we’ve seen virtually no progress. Not to mention, the Twitter stock hasn’t been doing that great either which is not the best of signs. If Elon’s deal does end up taking place, he’d be buying each share of Twitter for $54.20.
So, buying Twitter shares under this price is basically just free profit as long as the deal goes through. But, right now, Twitter stands at just $39.41 meaning that you’d profit 37% if the deal goes through at the original price. Given that the stock has sold off so much though, it doesn’t look like the market is super confident that the deal will end up taking place at least not at the original price.
So, what happened to Elon’s Twitter deal?
Starting off with the most noted concern, Elon is worried about how many fake accounts are on Twitter. In terms of fake accounts, we have two main categories which are inactive accounts and spam bots. Inactive accounts are self-explanatory. These are accounts that were created years ago, and the user has since stopped using Twitter or they have switched to another account.
But this is not what Elon is really talking about, his primary concern with fake accounts is spambots. Us YouTube people are extremely familiar with these. There’s probably some crypto expert in the comments section down below named Mary Jane who 40 people are willing to vouch for. Such spammers generally account for an extremely small portion of social media. However, given that each spammer operates 30 to 50 accounts, they actually make up a decent amount of the total accounts. Twitter says that fake accounts make up less than 5% of their daily active users, but being an avid Twitter user himself, Elon isn’t quite convinced.
But, what’s the big deal with fake accounts anyway? Sure, they’re a slight nuisance and it’s a shame that people fall for these scams, but it’s not worth halting an entire acquisition over right? Well, Elon thinks it is for a few reasons starting with the company’s business model.
Twitter makes money by selling ad slots on its platform just like most other social media platforms. But, if 10 or 20% of Twitter accounts are just bots, advertisers would be wasting a significant number of impressions on useless accounts. This would in turn lead to lower conversion rates which would lead to fewer advertisers wanting to market on Twitter and eventually less revenue for Twitter. Aside from less ad revenue, bots also ruin Twitter’s credibility.
Elon wants to make Twitter into this super righteous place where free speech is supported and people can engage in intellectual discussions about social issues. But, people won’t exactly be enthused to do this if a bunch of the platform is just bots. So, for Elon, dealing with the fake accounts is a matter of protecting Twitter’s credibility amongst advertisers and users, and consequently, he’s taking it pretty seriously.
Elon has requested a detailed report that goes through how Twitter is determining how many bots there are, but Twitter has been reluctant to hand over these details. The most likely reason for this is that they simply don’t have the details or they’re not confident about the details that they do have. Twitter’s CEO, Parag, was pretty upfront about how it’s extremely challenging to differentiate between legit accounts with seemingly suspicious activity and spam accounts with seemingly legitimate activity.
So, more likely than not, Twitter has been scrambling to find more evidence to support their claims before they hand over a more detailed report to Elon. Honestly, I don’t think Elon would cancel the deal over bots, but if there are more bots than Twitter initially claimed, Elon may try to use this as a negotiating point to drive down the acquisition price.
Though Elon has secured most of the funding required to buy Twitter, he doesn’t quite have it all. At the time of making this video, Elon has committed to paying $33.5 billion in cash and he has secured $7.1 billion worth of equity-based financing.
But, this only adds about to $40.6 billion meaning that he’s still $3.4 billion short of the $44 billion acquisition price. Elon has vaguely stated that the remaining amount will also come from various loans, but the specifics have yet to be finalized. At one point, he was in talks with a group of private equity firms to raise $2 to $3 billion. But, this wasn’t to make up for the disparity. This was to reduce the amount of cash Elon would have to put up. Maybe Elon’s goal is to shave down the acquisition price by 10% and pay no more than $40 billion for Twitter.
Aside from not securing the final amount, Elon has become much more cautious when it comes to equity-based financing. In May, he was working on getting a $12.5 billion margin loan based on his Tesla stock, but he has since scrapped the idea. This is likely due to the stock market and Tesla stock getting crushed since he made the deal with Twitter. Since April, Tesla stock has sold at 45%.
To make things worse, it seems like Elon is forecasting some potentially painful quarters to come for Tesla. Recently, he announced plans for laying off 10% of their salaried workforce. He’s also been talking about how GigaTexas and GigaBerlin are currently gigantic money furnaces because they can’t get enough parts to ramp up production. Elon has even started mentioning worries regarding bankruptcy. Now, I don’t think Tesla is in any risk of going bankrupt in the imminent future. But based on everything Elon has been saying, it looks like Tesla is likely in for some painful quarters which could drive the stock price lower. And the last thing that Elon would want is to get a margin call at the bottom.
So, it’s not surprising that he’s being a lot more cautious when it comes to equity-based financing. Elon’s not the only one with second thoughts either. The banks that offered to finance his debt have also put the deal on hold. The banks are fearful that credit investors won't buy the debt as long as Elon is fighting with Twitter regarding fake accounts.
So, they’re waiting for the uncertainty to subside before they actually put together the required funds. They’re technically not allowed to do this because the deal is technically still on. And Twitter can actually take the banks to court for not meeting their funding obligations. But, the general consensus is that it’s very unlikely that Twitter would actually waste money on taking these guys to court. After all, if Elon calls off the deal, it’s not like the funding would be that useful anyway.
So, Twitter’s best bet is to just convince Elon that the fake accounts are a negligible issue or to simply settle for a lower purchase price.
The points that we’ve discussed so far are completely under Elon’s control. At any point, he could just decide to proceed despite the fake accounts. And as for the financing, he could just sell off some more Tesla stock if he really needed to. But, even if Elon was willing to do this, it’s not like he could complete the deal right now anyway because there are external factors that are out of his control.
First of all, we have the HSR Act or the Hart-Scott-Rodino Act. Like with any piece of legislation, the HSR act has a bunch of stipulations and conditions. But, the part that applies to the Twitter deal is the 30-day waiting period. Whenever a merger or acquisition of a certain magnitude is proposed, the deal has to be reviewed by the Federal Trade Commission and the US Department of Justice.
These institutions then have 30 days to review the deal and either does nothing which is basically equivalent to approving it, or they can request more information. Just because they request for more information doesn’t mean that a deal is dead per se. But, this would delay the deal by months if not years. Usually, they’re just looking to stop monopolies from forming.
For example, they wouldn’t want Shell and Exxon to join or Boeing and Airbus to join. Within the social media scene, they might not want Facebook and Twitter to join, but Elon doesn’t own any other social media companies. Tesla’s a car company and SpaceX is a rocket company, so there’s really no risk of forming some sort of social media monopoly.
Something that may concern them is how much power this deal would give Elon, but I don’t think that this would be a gamechanger either. I mean, just take a look at how much power Mark Zuckerberg has. Even including the bots, Twitter only has 330 million monthly active users which is an insane amount, but only a fraction of Facebook. WhatsApp alone has over 2 billion monthly active users while Instagram has another 2 billion monthly active users.
And given that the government hasn’t yet broken apart Facebook, I don’t think they would put up much resistance. Not to mention, the 30 days have already passed, so it looks like the deal is good to go from a regulation standpoint.
Elon and Twitter do still need a few more government approvals, but this was really the main hurdle regulation-wise. Even after all of this though, there is still one more hurdle that the Twitter deal has to jump over, and that’s shareholder approval. At the end of the day, Twitter is a public company, so public shareholders do have a say in what happens to the company. Twitter hasn’t yet revealed what date the voting will take place, but it’s expected to happen in late July or early August.
Many shareholders do have concerns regarding Elon taking over the company. But, the general consensus is that the shareholders will approve the deal. And once they do, it’s just a matter of actually completing the deal.
Something that we haven’t discussed so far is what happens if Elon backs away from the deal, and the reason for this is that he can’t really back away. First of all, Elon will have to pay a $1 billion breakup fee, but that’s the least of his concerns. Unless it’s revealed that Twitter is a Ponzi scheme or something, Twitter will have the right to sue Elon for breaching the contract, and they could easily launch a multi-billion dollar lawsuit against him.
Not only would this be a massive hassle, but it would be a permanent stain on his reputation. And let’s be real here. Do you really think that he bought 9% of Twitter, sold $8.5 billion worth of Tesla stock, secured a bunch of funding, and made a $44 billion offer just to walk away due to bots that he was already aware of? That makes no sense whatsoever, these are all moves of a serious buyer and the bot thing is really just a negotiation tactic.
It may actually help him shave off a few billion from the acquisition price, but we’ll just have to wait and see. In the meantime, he’s looking to minimize his margin risk and ensure that the Twitter deal won’t screw over his Tesla stake. And given that the shareholder vote doesn’t have to take place till October 24, Elon and Twitter have plenty of time to figure this out.
And chances are, I think they will figure it out and that the deal will take place probably by the end of this year, but that’s just what I think.
Do you think the Twitter deal will go through? Comment that down below.