By taking Twitter private, Musk is making a bold bet
Elon Musk’s decision to take Twitter off the stock exchange allows him to make major changes quickly, but it also puts the company more heavily in debt, a risky move for a money-losing company.
It’s a long-established strategy with notable successes and failures, from computer maker Dell (a success) to Toys “R” Us toy stores (a failure).
But Twitter “is very different from a traditional takeover” of a company going out of business, said Steven Kaplan of the University of Chicago Booth School of Business.
Most of those takeovers are from businesses with positive cash flow, Kaplan said, but the social network is losing money — having posted losses in the first two quarters of 2022.
The equation is further complicated by Elon Musk’s $13 billion in loans, which will have to be repaid by the San Francisco company, not the entrepreneur personally.
According to a calculation made by AFP, Twitter will have to pay just under a billion dollars in the first year in interest and principal, a high amount for a group whose turnover has only reached 5 billion. dollars in 2021.
“That debt is tricky when you’re losing money, so there’s going to be a lot of pressure to cut costs and increase revenue so they can pay off their debt,” said Kaplan, a finance professor. Otherwise, Musk will have to find funds to avoid bankruptcy.
The contractor on Friday laid off about half of Twitter’s employees and is seeking new revenue streams, including an optional $8-a-month subscription fee for those who want a verified account.
The further development of Twitter may require an injection of capital, more difficult to raise, in theory, by an unlisted company.
“I don’t think you can raise more debt,” said Erik Gordon, an entrepreneurship expert at the University of Michigan’s Ross School of Business, but in this case “there’s a Musk factor…You tweet multiple times and you know, bring the cash.”
Another idiosyncratic element is that most of these agreements “are initiated either by financial logic or by industrial logic”, while Elon Musk “did not have one”, he said.
“He was just unhappy with the way Twitter was handling free speech” and concluded he could “handle it better,” Gordon said.
Typically, a market exit is followed by “radical changes” in a company, said Sreedhar Bharath, professor of finance at Arizona State University, and those changes may not be obvious because the company no longer has the obligation to communicate publicly.
“Society is immune to punishment from financial markets if they don’t like the changes,” he said. “Some might say that markets are overly focused on next quarter results” and that managers of newly privatized companies may “pursue long-term goals” without worrying about the short term.
“But with Twitter’s high public profile, key decisions are likely to become public,” noted Jagadeesh Sivadasan of the University of Michigan’s Ross School of Business. “This was evident in post-acquisition decisions about laying off key officers.”
A 2019 study by two researchers at California State Polytechnic University that looked at nearly 500 deals between 1980 and 2006, found that about 20% of large firms in leveraged buyouts filed for bankruptcy. within 10 years, compared to 2% for a sample of other companies.
“Most of them have done better than public companies,” Gordon said, “but they don’t get a lot of publicity…Big failures get a lot of attention and create this idea that debt kills money. company.”
“Most of the time it works, which is why people keep doing it,” Gordon added.
“Musk is one of the most creative people on the planet,” able to create three totally different companies, PayPal, Tesla and SpaceX, all of which reached over $100 billion in valuation, Kaplan said.
“He’s a talent magnet…He’s going to attract (on Twitter) some real talent that hasn’t been around for a while…I wouldn’t bet against him.”