During a TED conference on Thursday, 14 April, Elon Musk said that his proposed acquisition of Twitter is not about money but about free speech and “the future of civilisation.”
Nonetheless, the billionaire will have to cough out a lot of money if he wants to buy the social media platform in an all-cash deal and take it private.
In a letter delivered to Twitter on 13 April, Musk offered to buy all of its stock at $54.20 per share. The deal, which represents a premium of 38 percent over the closing price on 1 April, values the company at roughly $43 billion.
Musk – who started buying Twitter shares in January – now owns a 9.2 percent stake worth around $3.3 billion. To buy the rest of Twitter at his offered price, he will have to pay $40 billion.
And $40 billion certainly seems doable for Musk, especially when you consider the fact that he is the richest man in the world with a net worth of 251 billion – more than six times what he has offered for Twitter.
The problem is, Musk has offered to buy Twitter for “all cash consideration” but he doesn't have $40 billion lying around.
All-Cash Deal
When it comes to mergers and acquisitions, payment is usually done with cash, stock, or a combination of the two.
An all-cash deal involves offering shareholders cold, hard cash in exchange for their shares. This lets shareholders "cash out", leaving them with no say in the company's management.
Elon, who has previously described himself as a free-speech absolutist, is going for such a deal because he wants control over how Twitter is managed.
He likely refused to join the board because of the share cap mentioned in Twitter's filing with the SEC, according to which Musk cannot own more than 14.9 percent of Twitter stock while he is a director of the board.
The board also told Musk that he will have to "act in the best interests" of the company and shareholders – a stipulation that conflicts with Musk's free speech agenda.
"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."Elon Musk
Coming up With $40 Billion in Cash
Most of Elon Musk's wealth is tied up in Tesla; he owns about one-fifth of the electric car manufacturing company that he is the co-founder and CEO of.
Musk, after spending $2.6 billion on buying a 9.2 percent stake in Twitter, currently has about $3 billion in cash or other relatively liquid assets, according to Bloomberg calculations.
That leaves $36 billion for him to raise if he hopes to buy Twitter. There are a few ways he can accomplish this.
Borrowing Against Shares
Musk can borrow cash using Tesla shares as collateral.
However, he has already pledged a portion of his shares for other loans, according to proxy filings. Furthermore, Tesla has a policy which bars directors and officers from borrowing more than 25 percent of the value of their stock.
This, according to Bloomberg estimates, leaves him with about $35 billion that he could theoretically take out against his shares. But Tesla is a very volatile stock, so this amount could fluctuate and banks will be cautious.
He also has other assets he could likely borrow against.
Private Equity
Another option is to team up with a private equity firm or investors to share some of the financial burden of the acquisition.
Silver Lake, a private equity firm which owns a stake in Twitter, previously partnered with Musk when he attempted to take Tesla private in 2018.
However, according to The New York Times, such firms usually invest in companies with steady cash flow so that they can safely take out large debts. Twitter had a negative cash flow of $370 million in 2021.
New Corporation
A third option involves creating a new corporation where Musk can put his Twitter holdings as equity, Wall Street researcher Robert Willens told Barron's. He suggested that the company would be able to borrow more than what Musk personally can.
“That would be the way most (leveraged buyouts) are accomplished and this acquisition would certainly fall within that category," he told the publication.
Musk can also consider selling one-fifth of his Tesla shares to get $36 billion, but is unlikely to do so. Selling off that much could lead to a big drop in share price and cause investors and employees to lose confidence.
Selling SpaceX stock could also help him raise some money.
Roadblocks
Twitter announced on Friday, 15 April, that it would permit its shareholders to buy discounted shares if an entity owns more than 15 percent of the stock in the company without taking the approval of its board of directors.
This "poison pill" strategy would dilute his shares and make it even more expensive for Elon to acquire Twitter, effectively warding off a hostile takeover attempt.
Meanwhile, Twitter shareholder Marc Bain Rasella has sued Elon Musk.
Rasella claims that Musk's delay in disclosing his stake kept the share price down allowing him to continue buying more shares at a lower price, effectively cheating the sellers out of increased profits.
The US financial regulator Securities and Exchange Commission (SEC) was likely to scrutinise Musk’s moves around the Twitter deal, securities lawyers told NYT.
Such scrutiny could mean that private equity firms and banks would be wary of financing or partnering with musk.
Elon insists that he has “sufficient assets” to acquire Twitter, should its board approve. He also said that he has a "Plan B" if the offer is rejected.
The plan might involve a hostile takeover attempt, if this cryptic tweet is anything to go by.
He also said that he "will endeavor to keep as many shareholders in privatized Twitter as allowed by law."
(With inputs from Bloomberg, Barron's and The New York Times)
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