What Elon Musk Could Do to Buy Twitter Despite Its 'Poison Pill'

Elon Musk sought to buy Twitter for $43 billion but was met with a “poison pill” plan from Twitter's board of directors, which looks dire for his prospects, but is really just some mildly spicy hot sauce. 

Their “Shareholder’s Rights” plan might give Elon Musk heartburn, but Musk can probably pop a few antacids and bulldoze over the opposition. 

No, really.

Twitter is trying to stop the SpaceX and Tesla founder from making Twitter more useful for society through free speech and more profitable for its shareholders. 

How could he do it? Well, much of his wealth is in shares of SpaceX and Tesla.  So he would have to obtain financing (loans) to conduct a “leveraged buy-out” of Twitter.  

His opposition is coming from the left. However, the left's political leaders -- the Biden administration cannot pursue their “Green New Deal” hoax without pushing sales of Tesla electric cars. That may present Musk with an opportunity.

I am just brainstorming here, throwing out some food for thought.  Clearly, this is not recommending whether anyone should buy or sell shares of stock.  The topic is about non-financial motives -- including what is good for society. 

I write with the hope of stimulating further, robust analysis and comment by experts.  Before going to law school, including studying securities law, I earned a degree in Finance from the University of Florida, including studying these very things. 

This article is meant to entice practicing stock market professionals to join this conversation.

Reportedly worth close to $300 billion, and the richest man alive, quixotic and even eccentric Elon Musk quietly purchased 9.2% of Twitter when it was trading at low prices, almost certainly through many small, unobtrusive purchases. 

When Securities and Exchange Commission regulations finally required him to disclose the purchases, Twitter shares soared in price on the stock market.  Last Friday’s closing price was $45.08 per share.  We don’t know yet if Elon Musk continued buying after the reported 9.2% purchases.  He may own far more than that as of today already.  Allies and enemies are probably rushing to buy stock as well.

But the extreme leftists in Silicon Valley have a genius plan.  If Elon Musk reaches 15% ownership, then existing shareholders (but not Musk) can purchase an additional share for each of their shares at half price, which would make it presumably most costly for Musk to continue his buyout. 

This is a left-wing delusion, just like their approach to inflation and spending money. 

Twitter is reportedly worth $36 billion as a “going concern.”  There are today 800 million shares of stock.  Now, if Twitter issues 800 million new shares of stock, how much is Twitter worth now?  Well, it’s still worth only $36 billion.  If there are now 1.6 million shares of stock “issued” -- dividing up the same company still worth $36 billion --  then each share of stock is now worth half what it was.  The value of the company has not changed.  This is Leftist child-like thinking. 

So can Elon Musk purchase the $36 billion company?  He has offered to buy it at a premium, pledging $43 billion.  Twitter before the “poison pill” plan was $36 billion.  Twitter after the “poison pill” plan is still $36 billion.  Can Elon Musk buy a $36 billion company for $43 billion?  Yeah, I think so.

The only trick is that Elon Musk made an offer to buy shares of stock at $54.20 per share.  If that offer price stands, then existing Twitter shareholders can buy newly issued shares at half the current trading price of $45, or around $22.50, and then sell them to Musk for $54.20 per share, and earn more than $30 per share in instant profit. Nice.

But all Elon Musk has to do is adjust his offer price “for inflation” in effect.  All he has to do is say $54.20 per share was for the 800 million shares issued as of the date of his offer.  If Twitter issues newly created shares into the marketplace, then – naturally – the $54.20 offered for 800 million shares has to be adjusted downward to account for the increase in the number of shares floating around.

So, problem solved.  The “poison” turns out to be nothing but mildly spicy sauce, leaving Twitter still very tasty. 

Now, the devil is in the details.  This is all based on summary, generalized news reports.  The actual details of the Twitter “Shareholder Rights” plan have to be revealed and scrutinized.

The next thing that (I think) Elon Musk should do is commission a valuation of Twitter as a business.  But he must demand that the underlying assumptions and variables that go into that valuation be published, not just the estimate.  Then he should demand that all other analysts disclose what assumptions and variables they are using.

Twitter’s temper tantrum has just publicized for the entire world its desire to censor free speech and exposed Twitter’s extreme, radical hostility to more than half of its potential customers worldwide.  With what happened in the last few months alone, would you expect Twitter’s revenues to rise, fall, or stay the same?  Their revenue stream is probably going to shrink.  (Remember, Twitter makes money on advertising, but still.)

On Elon Musk’s proposal to buy Twitter for $54.20 per share (adjusted for share inflation we hope), the Board of Directors is legally required to cooperate and recommend the deal to its shareholders, as long as it represents a good value for owners of stock.

So the question becomes what is a fair price?  What is a good price?  Saudi Prince Alwaleed bin Talal Al Saud reacted by proclaiming that $54.20 per share is not enough.  But based on what?  Is that just wishful thinking?   Elon Musk should demand “Show me your analysis – with the assumptions you are making?”

Musk has not only criticized Twitter’s censorship but also the generalized bad management.  The criticism that Twitter’s Board and officers are just doing a bad job must factor into what is a “fair price.” 

Twitter has legally “authorized” and “issued” for public ownership and trading a little less than 800 million shares of stock.  So $36 billion / 0.8 billion = $45 per share based on the actual value of the business.  Somewhat magically, which rarely happens, Twitter is now trading in the stock market for almost exactly what the company is actually worth as an operating company (by one valuation estimate).

There are many ways to value a business, which is what gives financial analysts headaches.   Market capitalization is somewhat subjective, calculated by multiplying the current price of a share of stock by the number of shares of stock trading.  But the trading share price can fluctuate wildly, especially in times of turbulence, uncertainty, or Elon Musk. 

A more meaningful measurement is the fundamental value of the actual company itself, sometimes called the “Enterprise Value.” How much money is the company actually earning?  What are its expenses?  What will next year probably look like?  The year after that?  Deadly serious, the next 20 years?  Are income streams likely to grow?  Or is it in a declining industry or badly managed?  Are expenses likely to increase or stay the same as a percentage of revenues?  So if you get 12 business valuation experts in a room, you will get 20 opinions on how much a company is worth.  It depends on making many assumptions.

Finally, must Elon Musk actually own 51% of the shares of stock or merely have control?  He can solicit the proxies to be able to cast votes for shares he does not own, in a classic, dramatic “proxy war.”  Normally, most shareholders do not vote in shareholder meetings.  Normally, management requests that shareholders sign to them a “proxy.”  During a proxy war, a competing request urges shareholders to give proxies to an insurgent, competing team instead.  This can get very dramatic.

Normally, most shareholders are passive and don’t care.  Normally even if shareholders are not satisfied with the management of the corporation, there is no viable alternative on the horizon.  Because most shareholders don’t vote, a 10% ownership in a corporation can effectively mean control.

Elon Musk’s offer to buy, improve, fix, and transform Twitter is nothing like normal.  Musk is trying to return Twitter to its original purpose and many shareholders may have bought in on Twitter’s original concept.  But Musk has been strongly critical, in detail, of a wide variety of failings by Twitter management on other topics.

Therefore, Musk could win a classic, "shootout at the O.K.-corral" proxy war, even if he does not manage to own a majority of the actual shares of stock.

Image: OnInnovation, via Flickr // CC BY-ND 2.0



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