Elon Musk and Twitter (ii)

As I see it, securities analysis has an important qualitative aspect to it. The analyst basically makes up a story about a given company, based principally on a close reading of the SEC filings, plus research/media reports, life experience and trying the products or services the company in question provides. Then you test the story as time passes, as the company reports new information and as you continue to interact with what the company does.

This is the story I’ve made up about Elon Musk and Twitter:

Musk started the year owning about $150 billion worth of TSLA stock, plus options for perhaps an equal amount. He also controls private firms like SpaceX, Boring and Neuralink.

my story

Musk began to accumulate TWTR stock early in 2022. I presume this was initially to get enough influence so management would make operating changes he wanted. Apparently not satisfied with TWTR’s response, he made a hostile takeover bid at a very high price in April.

My imagining is that the offer was intended as muscle-flexing, and that Musk didn’t really want to own TWTR. Jack Dorsey called the bluff, however. For whatever reason (bella figura?), Musk couldn’t say “Just kidding!” and signed an ironclad contract to buy TWTR instead. After all, if all else failed, he may have thought, with stock in TSLA worth $150 million (plus options), he could easily get a margin loan to come up with the required $45 billion.

Then TSLA shares dropped by about 40%, and the light bulb went on that this wasn’t as risk-free a move as it had seemed a while before. But Musk couldn’t break the contract. So he cobbled together a number of equity partners plus $13 billion in bank financing to complete the deal.

TWTR financials

–the litigation settlement: There’s a $766 million provision in the 2021 financials for settlement of a lawsuit maintaining that in 2015 a prior CEO and CFO issued false guidance to shareholders to cover up a slowdown in company operations. Neither is with the company any longer, so this is a one-time cash flow statement issue


revenues have been growing at about 10% annually–90% of this from advertising–from 2018-20, before rising by about 20% last year and flattening in 2022. A reasonable guess is that full-year 2022 revenues will end up around $5 billion, implying $4.5 billion from ads.

–the income statement shows spotty results. This is mostly due, as I see it, to increases in R&D and sales and marketing expense. If we look at the cash flow statement, though, a large part of those expenses are issuance of stock to employees. Looking only at cash in and cash out, the company seems to be generating about $1 billion per year in cash

net new debt. TWTR added slightly over $1 billion in net new long-term debt during the first half of 2022. This implies that the previous management was unable to fund operational needs internally.


I’ve read that the amount of bank debt TWTR has assumed in the change of control is about $13 billion and that the banks providing this have agreed to interest payments capped at 7.5% of principal. Maybe so, maybe not. If both are true, however (and if they’re not, my guess is that the figures are too low), this would imply about $1 billion in extra yearly interest expense. There may be income tax savings from this extra expense, if TWTR can generate taxable income. If not, paying interest will soak up just about all the cash the company generates. A potential mess, particularly if there’s any decline in cash generation!

my take

Musk’s advertiser-alienating, in-bad-taste Pelosi tweet suggests to me that he had given very little thought to TWTR–and the lack of any headroom between revenue and expenses–before taking control.

Arguably, his best (only?) revenue growth option is to begin to charge subscription fees. It’s not clear to me whether Musk believes that TWTR has gone ex-growth with advertiser revenue or just that subscriptions are a faster route to added revenue inflow

Even though it’s not clear that reducing staff is a good thing, the huge increase in interest expense generated by the takeover–and, at the same time, the reduced attraction of stock in a private company–imply that it can’t be avoided.

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