What Elon Musk’s Twitter offer reveals about the stock markets

«Means & Purpose» – Good money for a good life

Luke Sustala

You are reading an excerpt from the «Means & Purpose» newsletter. At «Mittel & Zweck» we want to put aside the very German tradition «you don’t talk about money» and talk to you about finances – and how you can shape your future with a good plan and the right tools. You can subscribe here. And here you can see what you’ve missed so far.

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But now to today’s edition. It’s about the takeover of Twitter by Elon Musk – and what it reveals about the stock markets.

topic of the week

The Twitter takeover: Elon, what’s the point?

Where should you go with Twitter?  Elon Musk still owes some answers.

Where should you go with Twitter? Elon Musk still owes some answers.

Hannibal Hanschke / Reuters

I have to start with a confession. I spend way too much time on Twitter – and soon I’ll probably be spending way too much time with Elon Musk. The social network with the little blue bird as a logo has obviously been convinced by the takeover by the Tesla founder and multi-billionaire.

As the world ponders what this means for free speech on Twitter, the episode also says a lot about the stock market in 2022: How the takeover is to be financed, why Musk is making Twitter a “private” company – and what consequences this had for stock prices.

Give me an M, give me an A

But basically: M&A is always relevant for you as an investor. M stands for mergers, i.e. the merger or amalgamation of companies. A stands for acquisitions, i.e. takeovers of one company by another or by an investor. And there’s been a lot of that over the past few years. According to the financial data service Refinitiv For the past seven quarters (up to and including Q1 2022), global mergers and acquisitions have been in excess of $1 trillion per quarter.

M&A activity is often very dynamic, especially in times of high share prices and low interest rates. Many takeovers are not financed with “cash”, even if it sometimes sounds like that, but they are financed with shares (equity) or bonds (debt capital). When company A buys company B, B’s shareholders often receive shares of A.

If takeovers are really processed by buying the shares, then this very often takes place by issuing corporate bonds, i.e. debt. In the case of Twitter, Musk has pledged Tesla shares to various banks and received loans of over 25.5 billion dollars for a possible Twitter purchase. Together with his own cash of 21 billion dollars, he can financially support the takeover.

Why Twitter is now “private”.

By the way, the whole thing fits well with a trend (which the US Securities and Exchange Commission has also noticed): the boom in «private» markets. Private investors take over listed companies and take them off the stock exchange. A “public company” thus becomes a “private company”. But what is behind it?

On the one hand, you don’t have to deal with the same disclosure requirements, which is particularly relevant for restructuring processes. On the other hand, the power then clearly lies with the private owners. Publicly traded companies are also often acquired by private equity funds, delisted, reorganized (e.g. split into different lines of business) and later (hopefully at a profit) relisted. Such private equity funds are a very popular asset class: Danish pension funds, the sovereign wealth fund in Norway and also the endowment billions of the elite universities Harvard or Yale rely not insignificantly on such private investment funds that actively manage and shape companies instead of just passive investors to be. For Musk, however, it is more about control and disclosure requirements.

Twitter boom, Tesla bust

It’s not surprising that Twitter’s stock has soared in the wake of the pending acquisition. After all, Elon Musk has also promised to pay a significant premium above the share price at the beginning of April. The Tesla share is more exciting (with which the takeover is financed to a considerable extent). Since the first declaration of a plan to take over Twitter, it has lost 23 percent in value. It sounds strange at first glance, but Tesla’s stock is the big loser in this story: the electric car maker lost $272 billion in market value – much less than the Twitter takeover would ultimately cost.

There are probably several reasons for this. Tesla had rushed from record to record in the past few months, and a correction is always possible in such an environment. And the stock remains a bet on the future because it’s still very expensive — the market value is very high relative to Tesla’s earnings.

In addition, there are financial risks. Analysts warn that Musk could also “choke” on the takeover. Because part of the takeover bid is financed by a risky margin loan. That loan is backed by Tesla stock and could become a problem for Musk if Tesla stock continues to fall. Reuters for example took a closer look at it. According to this, Musk has already borrowed so much money based on his Tesla shares that he may soon actually have to sell in order to be able to finance further acquisitions.

And finally, there is also a psychological moment. Elon Musk has put a lot of focus and energy into the Twitter acquisition, which may unsettle some investors. It may be interesting and sometimes funny that he has been delivering passionate infights on Twitter for weeks about what exactly he intends to do with the platform, what he thinks of the media and how he feels about freedom of speech.

But as the founder, owner and CEO of today’s most valuable car manufacturer should it provide answers to other, more pressing questions: How is Tesla dealing with the massive increase in material costs for batteries due to the Russia-Ukraine war? How does Musk secure supply chains in global competition to avoid further production delays? This is probably more exciting for Tesla shareholders than the question of whether there will be an edit button for tweets in the future.

Skepticism is appropriate

This also leads us to the not unintriguing question: Who actually benefits from the merger and acquisition boom? As a broadly diversified stock investor, it may not matter to you which company is currently planning an acquisition and which one is being bought. On the other hand, if you hold individual stocks, it can definitely make a difference. The financial literature on M&A activity, for example, suggests that takeovers are often not the major drivers of returns for shareholders. In the case of takeovers, managers and CEOs often pay significantly inflated prices for the shares of the takeover candidate, which would not be justified by the promised savings or synergy effects. While the shareholders of the companies that are taking over others tend to look through their fingers, things are of course quite different for the investment banks and consultants who accompany the deals.

Here you can find more on the topic:

  • Musk and the Twitter takeover: “Free speech” doesn’t ring the till, analyzes the NZZ.
  • Musk tears up the typical M&A manual“Reuters” came to the conclusion.
  • There are a number of studies on M&A. However, the CFA Institute has a summary worth reading here a lecture by finance professor Aswath Damodaran on the value of takeovers and mergers: «just say no».

Thank you very much for your attention! If you have any questions or comments, feel free to reply to this email.

Good buy!

Luke

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