more about Twitter

Summarizing what I think is the essence of Twitter’s current financial situation:

The company has recently been growing revenues–from corporate advertising–at maybe 10% a year. It is generating cash at about a $1 billion yearly rate, mostly because the issuance of $1 billion worth of new shares to workers is a prime component of their compensation.

The Musk takeover has done two things: it has added something like another $1 billion yearly drain on cash, in the form of interest expense from the $13 billion borrowed to close the deal (insiders and the banks presumably know the exact terms; I don’t); and it has considerably reduced the attraction of stock grants as a form of compensation.

Four complementary approaches to fixing the resulting financial dilemma:

–cross fingers; hope and pray everything works out

–increase revenues

–lower costs, meaning total employee compensation

–restructure the debt.

Musk’s tweet about the Pelosi family suggests that keeping advertisers happy isn’t exactly top of mind for him. Press reports suggest least some advertisers have already cut back on their Twitter spending.

Over the first half of 2022, people-intensive operating spending amounted to about $1.8 billion, about a quarter of which was stock grants of some type. This is where Musk appears to have focused for now, with mass layoffs. Even if no advertisers had second thoughts about a Musk-led Twitter, my back of the envelope calculating says that replacing stock grants with money would have left TWTR without much cash, if any.

The banks who lent Musk the $13 billion in cash he needed to close the TWTR deal must have known this.

My mind keeps going back to a banking case I studied in business school. A consortium of international banks lent the government of New Zealand a bunch of money to develop an offshore oil and gas field. The term of the loan, as I recall it, was four years. But production from the field wouldn’t begin until year five. A problem? No.

The lending banks all understood that the loan would need to be renegotiated during year four, meaning another round of fees and higher interest rates. So the structure was a good thing for them. Assuming the NZ government wasn’t chock-full of dimwits, Wellington understood this, too. As it turns out, the only one mixed up about this loan was the professor who presented the case in class, who didn’t know the physical or monetary differences between oil and natural gas.

In the TWTR case, I read the company’s financials as saying that, absent revenue growth, compensation costs have got to be cut more or less in half–without any loss in company efficiency–for the banks to be comfortable they’ll get their money back with the current loan structure. My thought is that the loans are either secured by other assets of Musk’s or that restructuring is Plan B. There’s lots of talk in the financial press that the banks are trying to offload at least some of their exposure to distressed debt specialists. To my mind, this only makes sense if the lenders didn’t bother with any credit analysis before making the loan.

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