Musk’s takeover of Twitter turns into sardine trading, is it good for society?

This article was written exclusively for Investing.com.

  • Elon Musk’s attractive offer for TWTR
  • He believes he can unleash the potential of the social media platform.
  • TWTR’s Poison Pill Saved Time
  • Musk gets what he wants
  • Build an empire

An old joke circulates in stock market circles about the sardine trade. When sardines disappeared from the waters of Monterey, California, commodity traders drove the prices of cans of sardines to high levels. One day, a buyer decided to treat himself to an expensive and rare meal, by opening a box and consuming its contents. He immediately falls ill and tells the seller that the sardines are not good. The seller replies: “You don’t understand. It’s not sardines that we eat, it’s sardines that we exchange”.

This story embodies the notion that asset prices can deviate from underlying fundamentals. We’ve seen examples of company stocks that have become trading sardines over the past few years. The most recent were GameStop (NYSE:) and AMC Entertainment (NYSE:), where a mob of traders and investors on social media sites flocked to pools of capital holding risk positions in stocks, pushing prices to incredible heights, despite weak earnings and individual fundamentals.

Elon Musk’s (NYSE:Twitter) offer, along with the company’s initial reaction to a poison pill before it was finally released just yesterday, is likely to make TWTR stock the last sardine in the market, where the stock price will experience heightened volatility, while company fundamentals become a sideshow.

Elon Musk’s attractive offer for TWTR

Elon Musk, the famous CEO of Tesla (NASDAQ:), who is also the founder of SpaceX, the Boring Company and other companies, and the richest person in the world, has offered to buy Twitter, the main company of social media, for $54.20 per share; yesterday’s deal is for $44 billion in cash. Musk plans to take the company private.

Source: Barchart

The chart shows that TWTR stock was below $40 per share before Musk announced his offer at $54.20. He had already accumulated around 9% of the shares of the company before the announcement of his stake; after this was made public, rumors emerged that he would take a seat on the board, although he said at the time that he would keep his stake below the 15% level.

However, when the position on the board collapsed and discussions of his plans for the company did not align with those of the incumbent board members, he decided to buy out the company. company and remove control from the current board of directors.

He thinks he can unleash the potential of the social media platform

Musk has been a constant presence on Twitter. And lately, he has been using this platform to showcase his plans for the company. On April 19, he tweeted:

Earlier this month, on April 9, he asked:

“Is Twitter dying?”

Prior to his candidacy, Musk revealed his issues with the company, tweeting:

“Given that Twitter serves as a de facto public square, failure to adhere to the principles of free speech fundamentally undermines democracy.”

Last week, Tesla’s results for the first quarter of 2022 blew the lid off the balloon, as the company reported EPS of $3.22 versus $2.26 expected by analysts. Total revenue was $18.76 billion, versus $17.80 billion expected.

Musk’s success as CEO made him the richest person in the world, but, at least initially, Twitter’s board didn’t want him to own the company.

TWTR’s Poison Pill Bought Time

Twitter’s board of directors and many high-ranking employees operate as if Twitter is their company. However, it is the shareholders who actually own the social media platform. To challenge Musk, the board made decisions on behalf of shareholders to block the company’s privatization plan.

Musk took to Twitter to ask his followers:

“The $54.20 privatization of Twitter should be decided by shareholders, not the board.”

The response was 83.5% yes and 16.5% no, showing overwhelming support for his bid for the company. Founder and former CEO Jack Dorsey has accused Twitter’s board of “dysfunction”. Mr. Dorsey is currently a member of Twitter’s Board of Directors.

To challenge Musk’s bid for the company, the board adopted a ‘poison pill’ – a scheme that gives existing shareholders the right to buy additional shares at a discount, diluting the stake of any new ones. hostile shareholder – intended to limit Musk’s ability to increase his stake in the company. Despite this, the board ultimately approved Musk’s offer. The transaction is now subject to a shareholder vote, after which there should be no regulatory hurdles to clear.

Musk’s decision to privatize Twitter appears to go beyond the pursuit of profit. His ideological objection to the social media platform appears to be the reason for the proposed acquisition.

As of the end of last week, Musk’s net worth was around $265 billion, so profit is secondary or even absent from the equation. Indeed, still on April 18, to further provoke the board, Musk tweeted:

“The board salary will be $0 if my bid is successful, which is a savings of $3 million per year.”

Each Twitter board member receives between $250,000 and $300,000 in annual compensation.

Musk gets what he wants

Musk is a character. He smoked weed on a podcast with Joe Rogan, challenged US regulators, built companies that are technological masterpieces, created jobs and wealth, faced US senators and is now become the owner of Twitter.

He is a prolific user of the social media platform with over 82 million followers. To fund its TWTR offering, it secured $46.5 billion in funding and is in the process of raising an additional $12.5 billion for the offering via a margin loan secured by its TSLA shares. Morgan Stanley (NYSE:) leads a group of financial institutions providing $13 billion in debt financing.

On Monday, April 25, TWTR stock was trading at $51.70 per share. The board of directors approved the purchase before the market closed.

Regulators will need to approve the deal, which could take some time, although no delays are expected. Yet Musk is not one of the SEC’s favorite tycoons. Nevertheless, nothing stands in the way of the richest person in the world becoming the owner of the global “public square”, as he calls Twitter.

The other investors alongside Musk will want to see a return on their investment and are betting on him to make the company another gem in his growing empire.

Build an empire

Speaking at a recent TED talk, Musk said he had a “plan B” if TWTR’s board rejected his offer, and the “poison pill” paved the way for a battle. A potential Plan B strategy would be to partner with three other Musk-friendly investors, each buying 15% of the company to oust the board with a change in majority control of the company. Once he secured the financing and no other buyers came forward, the board had no choice but to accept the juicy offer.

In summary, Musk was on an ideological quest for Twitter, and he came out on top. He now has a wealth of options to expand his empire to the world’s leading social media platform.

He can fix Twitter’s business model and take the company public in a few years. He can make it part of a mega-corporation, including SpaceX, the Boring Company, and even Tesla. Whatever Musk’s final decision, some Twitter-related parties are already on board.

Following the news of the deal, Twitter co-founder and former CEO Jack Dorsey tweeted, also referring to current TWTR CEO Parag Agrawal:

Dorsey went on to say:

I’m so happy that Twitter continues to serve the public conversation. Around the world, and in the stars!

Once again, the market learned a lesson with the acquisition of Twitter: it’s not a good idea to bet against Elon Musk.

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