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Dan Ives is Managing Director and Senior Equity Research Analyst covering the Technology sector at Wedbush Securities
‘Greed, for lack of a better word, is good’
That’s Gordon Gekko’s line from Wall Street, the epic 1987 movie about corporate raiders, starring Michael Douglas as the cutthroat investor and Charlie Sheen as the naïve up-and-comer.
Gekko delivers the ‘greed’ line at a packed meeting for the fictional firm, Teldar Paper.
He’s trying to convince the shareholders that they’ll make more money on their investments if only they’d join him in wrestling control of company away from its existing board and handing it to him.
It’s called a hostile takeover.
‘The new law of evolution in corporate America seems to be survival of the unfittest,’ says Gekko. ‘Well, in my book you either do it right or you get eliminated.’
It’s an imperfect comparison, but it goes a long way toward explaining what will likely happen next as visionary billionaire, Tesla and SpaceX CEO and serial tech entrepreneur Elon Musk sets his sites on owning Twitter.
Just like Teldar in Wall Street – Twitter is an underperforming company.
Gekko, played by Michael Douglas (above), delivers the ‘greed’ line at a packed meeting for the fictional firm, Teldar Paper.
The epic 1987 movie about corporate raiders stars Michael Douglas (right), as the cutthroat investor and Charlie Sheen (left), as the naïve up-and-comer.
It has lagged behind it’s social media competitors like Facebook, Instagram and TikTok.
Advertising is lackluster, subscriber growth and monetization are disappointing, and increasingly divisive debates over censorship and freedom of speech are a constant public relations nightmare.
Musk saw an opportunity to go for Twitter and he took it.
Now, this fight is likely to get very nasty (a very hostile takeover). And it’ll probably reach it’s crescendo at Twitter’s next shareholder meeting.
This all started on April 4th, when Musk shocked the world with an announcement that he took a 9.2% stake in Twitter worth $2.89 billion.
In response, Twitter’s board offered Musk a seat expiring in 2024.
It was a friendly move (potentially an attempt at de-escalation) to embrace Musk with open arms, as a passive stake was just the start of Musk’s involvement.
Of course, the seat came with strings attached.
Federal regulations would have required Musk to keep his ownership level under 15% and he’d have to keep his criticism of the company quiet.
He’d also need to operate within the corporate culture of the board and company.
Musk didn’t find any of that appealing and on Thursday he shocked the world again (although more predictably).
Twitter announced that it had received an offer from Musk to purchase 100% of the company at $54.20 per share in cash or $43 billion total.
The offer represents a 38% premium per share since the day before his disclosure of ownership.
‘This is not about the economics,’ Musk (above) said at the TED2022 Conference in Vancouver. ‘My strong intuitive sense is having a public platform that is maximally trusted and broadly inclusive is important to the future of civilization.’
‘Twitter has become kind of the de facto town square, so it’s really important that people have both the reality and perception that they are able to speak freely, in the bounds of the law,’ Musk said
Twitter shares traded at $70 less than a year ago.
In the filing, Musk noted that he doesn’t have any faith that Twitter’s current board is up to the challenge of turning around the company.
‘…since making my investment I now realize the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company,’ he wrote.
Musk also noted that this would be his final offer.
In a typical negotiating tactic, Twitter’s largest shareholder, Saudi Arabian Prince Alwaleed bin Tala rejected the offer. The shareholders want to drive a higher price.
Hours later, speaking at the TED2022 Conference in Vancouver on Thursday afternoon, Musk fired back.
‘This is not about the economics,’ Musk said. ‘My strong intuitive sense is having a public platform that is maximally trusted and broadly inclusive is important to the future of civilization.’
‘Twitter has become kind of the de facto town square, so it’s really important that people have both the reality and perception that they are able to speak freely, in the bounds of the law.’
Right now, the Twitter board is meeting to consider Musk’s bid.
Their immediate next steps are predictable, but then it becomes more unclear.
Within the next 24 hours, Twitter will probably reject Musk’s offer – saying it undervalues the stock and they’ll question whether Musk has the financing to pull this off.
Musk was, of course, ready for this.
He told the TED crowd that he has a Plan B if his offer is rejected and he insisted that he has assets to finance this deal.
We predict he’ll do the financing through a combination of his cash and borrowing against his stock in Telsa.
Then, it gets tricky for Twitter.
The board cannot call it a day after rejecting Musk.
The clock has struck midnight for Twitter.
As a public company, the board has a fiduciary duty to increase value for shareholders. If they leave an all-cash offer for the company on the table without presenting a reasonable alternative – they are inviting shareholder lawsuits.
The board will turn to outsider investors and talk to top shareholders for a period of 30 to 45 days.
In a typical negotiating tactic, Twitter’s largest shareholder, Saudi Arabian Prince Alwaleed bin Tala (left) rejected the offer. The shareholders want to drive a higher price.
They’ll be looking for someone or more likely a group to present them with a better deal than what Musk offers.
But it would be hard for any other bidders to emerge.
Microsoft is one possible choice, but they are already looking to buy Activision – a $70 billion deal.
Twitter may appeal to private equity investors or a consortium of the like, but again Musk seems like the only game in town.
Meanwhile behind the scenes, Twitter will likely be negotiating with Musk to get more money and concessions.
If the board shuts him out completely, Musk will fight his battle in the public to convince shareholders to abandon ship.
Already, we’re hearing rumblings from Twitter employees and expect a flood of resumes out of the company if Musk takes over, but that’s not something that the board should be concerned with.
They represent the shareholders, not the employees.
Bottom line – something has got to give.
Musk is dead serious about running Twitter just like he is serious about SpaceX and Telsa.
The current board does not want Musk involved because they disagree on nearly everything and his style is incompatible with their corporate culture.
Lastly, Wall Street wants Twitter to be sold.
They can’t go on as business as usual any longer.