How a year of Elon Musk created a $US30 billion hole for his Twitter backers

A year ago last Friday, Elon Musk took control of what was then Twitter. It has not been a good year for Musk, his bankers or for many of the users of the platform now known as X.

Musk paid $US44 billion (then $68 billion) for Twitter, loaded up the barely profitable business with $US13 billion of new debt and then promptly trashed both the service and the business’ finances.

It has been a year since Elon Musk took control of what was then known as Twitter.Credit: Getty Images

It was apparent, even before he reluctantly completed a deal that he tried to walk away from, that Musk had overpaid.

It’s now even more obvious, with the $US4.5 billion of advertising revenue that used to generate 90 per cent of Twitter’s total revenue down, by Musk’s own admission, by more than 60 per cent.

He has tried to offset that by creating subscription revenue, but fewer than 1.2 million of X’s users – less than 1 per cent of its user base – pay the $US8 a month for “verification” and preferential treatment of their posts. That’s, at most, about $US115 million of revenue a year against the more than $US2.5 billion of advertising revenue that has evaporated under Musk’s tenure.

Meanwhile, with interest on the $US13 billion of debt ticking away, X has negative cash flows and the banks are restless.

Musk’s pursuit of his version of free speech has shifted the formerly left-leaning balance of posts on Twitter towards the right on X.

A conservative estimate of how much Musk overpaid in a then-falling market for Twitter was, at the point of acquisition, about $US15 billion.

Fidelity, the US funds management giant, was one of the investors in the $US7 billion of third-party equity Musk was able to rustle up for the acquisition.

It has since written down the value of its interest by almost two-thirds, implying X is now worth only about $US15 billion – which, given what’s happened to both its revenues and, thanks to the interest on the debt, its costs, would appear a reasonable estimate of X’s worth.

It’s not only Musk and his co-investors who are hurting. The banks that provided the debt for the deal – Morgan Stanley, Bank of America, Barclays, BNP Paribas, Societe Generale, Mitsubishi and Mizuho – haven’t been able to do what they would normally do and sell down their exposures. They have been forced to retain the loans on their balance sheets.

If X is worth only $US15 billion, not only would the equity holders be wiped out, but the banks would also be facing massive, multibillion-dollar losses. Estimates that they would take a $US2 billion hit if they tried to offload the debt today appear extraordinarily generous when a highly sophisticated institutional investor believes it is worth almost $US30 billion less than Musk and his financiers paid.

Their forbearance probably relates to the absence of alternatives and to Musk’s vast wealth – he could, if he wished, or if push comes to shove, bail them out. In the meantime, they’ve got capital tied up against a loan that looks very dicey and is, at best, high-yield junk.

Musk and his recently appointed chief operating officer Linda Yaccarino have been talking up the platform’s prospects, claiming advertisers are returning and the user base is growing.

While some advertisers have reappeared, most of the big US advertisers continue to shun the platform and those advertisers that have returned are spending much less than they once did, according to the agencies that track advertising spending. The former top five advertisers on Twitter are spending nearly 70 per cent less than they did pre-Musk. Traffic on the platform is down at least 14 per cent over the past year.

Musk’s pursuit of his version of free speech has shifted the formerly left-leaning balance of posts on Twitter towards the right on X.

His gutting of its content moderation capabilities has unleashed a cacophony of misinformation and disinformation, alienating advertisers and many of its former users, although US Republicans and libertarians have applauded the shift and the return of formerly banned voices to the platform.

Musk still has grandiose ambitions for X. He is still pursuing a long-held vision of an “everything” app that is not only a town hall for conversations between users but is also a global payments platform that handles all users’ financial services, from remittances and credit and debit cards to savings, loans and securities trading. X has been granted money transmitter licences in several US states.

He also plans a video service to challenge YouTube and wants to compete with Amazon and LinkedIn, and he and Yaccarino told X’s employees last week they also wanted to launch a news wire.

Musk told X staff last Thursday that if a transaction involved money, it would be on the platform, with users not needing to maintain a bank account.

“It would blow my mind if we don’t have that rolled out by the end of next year,” he is reported to have said.

Having reduced the employee numbers of a much more limited service from 7500 to about 1500, whether X’s capabilities can match Musk’s ambitions is a relevant question.

While there are some successful “everything apps”, most notably in China, it is unclear whether there is any demand for one elsewhere.

Given how erratic X has been on Musk’s watch, would there be enough prospective customers willing to hand over management of all their finances to the platform? The financial services sector is densely populated and the history of much bigger tech companies than X (Facebook, Google, Amazon) trying to break into it isn’t encouraging.

Would people rather put their trust in Musk for their financial transactions or in JPMorgan Chase, or Barclays, or Commonwealth Bank?

Can X really compete against YouTube, or Google or Amazon?

Clearly, if Musk’s vision were to be realised, it would take a lot more investment and far more employees just to transform X to the point where it had the capabilities to offer the services.

Is Musk going to personally fund what would almost inevitably have to be a multibillion-dollar investment? He’s got the personal financial resources, but is he willing to throw a lot of good money after the bad?

How would his banks respond if he greatly increased X’s costs ahead of any increase in revenues?

Musk told an audience at a TED talk last year that Twitter wasn’t a way to make money and that he didn’t care about its economics at all. He has certainly made good on those convictions.

The social licence to operate a financial services business and handle other people’s money is built on relationships of unquestioning trust.

If he wants X to be a trusted financial intermediary (along with all the other ambitions he has for it) he needs to stabilise the existing business and its user and revenue base, and regain trust in the platform and its content. However, those don’t appear to be on his current list of priorities.

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