Elon Musk's Aquisition of Twitter
On April 25, Twitter and Elon Musk announced officially that Musk would take over Twitter and make it private. They expected the acquisition deal to close by the end of this year.
After Musk announced to acquire Twitter, he joined an interview with the founder of TED Talk, Chris Anderson, in which he shared that his goal is to make Twitter a “politically neutral” place and to promote free speech and democracy. Currently, Twitter bans posts relevant to harassment, abuse, and misinformation concerning the COVID-19 pandemic; however, Musk hopes to loosen the rules and allow the existence of the gray area – a circumstance where it is difficult to judge what is right and what is wrong based on current laws and regulations – since these contents are legal despite their offensive nature. Moreover, his behavior may annoy some political left and please the right. Also, on May 10th, Musk decided to reverse the permanent plan against Trump and reinstated Trump’s account after it was permanently banned.
Another goal for Musk is to reduce the spambots, since Musk found that some bots mimicked him and used his image and name for promoting cryptocurrency scams, damaging his reputation. Meanwhile, he expects to eliminate all spam accounts and “authenticate all humans” using methods such as two-factor authentication, while some activists argue that this is similar to the “real-name” policy and contradicts Musk’s promotion of free speech in some way.
Furthermore, Musk also shares his anticipation to establish an ad-free Twitter. Nevertheless, over 92% of Twitter’s revenue is from advertisements at present. Last year, Twitter launched a premium subscription service called Twitter Blue, but rarely did any people pay for it. Without revenues from advertisements, Twitter may have to depend heavily on data licensing, which only accounted for 14% of total revenue in 2020. Therefore, Twitter may have to sell more subscription information and public data which include current trends and user demographics to developers and companies. However, this also means that Twitter is facing a significant short-term loss in revenue before it could expand its service of data licensing. Lastly, given Musk’s passion for Artificial Intelligence, he hopes to “make the algorithms open source to increase trust.”
On top of that, Musk’s acquisition journey has not been smooth. On January 31, Musk started to buy Twitter’s shares quietly and held an approximately 5% stake by March 14. Ten days later, Musk started to share his criticism about Twitter, such as flaws in Twitter’s algorithm and its lack of free speech. On April 4th, Musk had purchased 9.1% of Twitter, and Twitter’s stock price was soaring; meanwhile, as the largest shareholder in Twitter, he was invited to become a board member, which would restrict his stake up to 15%, but he rejected the board seat and immediately announced the acquisition news to the public. To respond to Musk’s offer of buying the entire company, Twitter launched a poison pill to dilute Musk’s stake. The poison pill allowed shareholders to buy more shares at a discount if any shareholder would hold more than 15% of ownership. A couple of days later, Musk succeeded in negotiating with Twitter and started to run the financing round. He finalized a $44 billion deal to purchase Twitter. Meanwhile, he had to pay a $20 million fine to the SEC for a charge of market manipulation. In addition, he would have to pay $1 billion and face multiple lawsuits from social media companies if he no longer wishes to buy Twitter.
Although Musk has an estimated net worth of $245 billion, the majority of which is tied up in stocks. Also, given that he had to pay fines and didn’t have much liquid money on hand, he was facing some financing challenges along with the risks such as the burst of tech bubbles and the supervision of the economic and regulatory agencies. Therefore, after talking to investment firms and other high net-worth investors concerning the financing round, Musk decided to have $13 billion in debt financing, $12.5 billion in loans against his stock in Tesla, and another $21 billion in cash to buy the rest of Twitter’s equity. Meanwhile, he also tried to persuade Twitter’s major shareholders to roll their stake into the deal rather than cashing out.
In May, Musk showed his hesitance concerning this deal and threatened to pull the deal multiple times and even temporarily paused it. He was waiting for more information and calculations to confirm that the spam accounts represent less than 5% of users. Consequently, Twitter’s stock plummeted. Nevertheless, he would still have to pay the $1 billion breakup fee if he were to pull the deal. It is currently unsure what Musk’s next move is, but he indeed has to make a hard decision after balancing the costs of acquisition and the break-up fee under the contemporary challenging economic background.