Elon Musk’s Twitter deal collided with market and economic tumult

Plunging shares in Tesla and a darkening outlook for social-media companies made the $64bn deal less appealing over time.

Elon Musk. The outlook for the digital advertising that drives Twitter’s business — and for the economy more broadly — had darkened considerably. Picture: Maja Hitij/Getty Images.

Elon Musk’s timing with Twitter turned out to be terrible.

When the world’s wealthiest man started buying shares in his favourite social-media platform on January 31, tech stocks were only a little more than 10 per cent off their all-time highs, and talk of a recession was still largely out over the horizon. By the time Mr Musk told Twitter on Friday that he wanted out of the $US44bn ($64.2bn) takeover he had agreed to, the Nasdaq Composite index was deep into bear-market territory, inflation was at levels not seen in decades, and Russia had launched an all-out assault on Ukraine, further roiling markets.

The plummeting price of Tesla shares had knocked more than $US100bn off Mr Musk’s net worth from its November peak and weakened a key asset he was using to help fund the deal. The outlook for the digital advertising that drives Twitter’s business — and for the economy more broadly — had darkened considerably. Less than three weeks after the deal was inked, the social-media company’s chief executive, Parag Agrawal, imposed a hiring freeze, citing “a very challenging macro economic environment.”

In a letter on Friday conveying Mr Musk’s intention to walk away from the deal — which Twitter has vowed to fight in court — his lawyer said the company had failed to provide access to information he needed to verify its estimates about the level of fake and spam accounts on the platform. Mr Musk, who has initiated a round of lay-offs at Tesla amid his own stated concerns about the economy, also is unhappy about Twitter’s decision to impose the hiring freeze without consulting him, according to the letter from his lawyer on Friday.

Since Mr Musk started in mid-May — 18 days after signing the deal — suggesting the issue of spam and fake accounts could affect the agreement, analysts, investors and other close observers have speculated that he might be leveraging the issue to renegotiate price or exit the transaction amid the worsening economic outlook. Some Tesla fans and investors were getting nervous about the deal, saying they felt it was distracting Mr Musk at a difficult time for the car company, and wanted him to walk away. Mr Musk largely appeared to shrug off the deteriorating market conditions, saying he wasn’t looking to make money off the deal. “Having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilisation. I don’t care about the economics at all,” Mr Musk said in April.

Whatever the case, the financial picture for the proposed deal has worsened steadily since Mr Musk agreed to buy Twitter for $54.20 a share on April 25. Twitter’s share price had fallen 17 per cent through Friday’s close, and its market value was some $US16bn below the valuation at which Mr Musk had agreed to take the company private.

At the start of the year, Mr Musk was still riding high. Tesla, which underpins most of his personal wealth, reported a record $US5.5bn annual profit in January — more than seven times the prior year, which was its first ever without a net loss. The share price a few months earlier had hit a record high of $US1,243.49, putting Mr Musk’s personal net worth at over $US330bn at the time.

By the time Mr Musk inked the Twitter takeover deal, Tesla shares were down 19 per cent from their November peak. Shares in Twitter had been trading up since Mr Musk disclosed in early April that he had bought a large stake, but stock prices for rival social-media companies such as Facebook-owner Meta Platforms and Snapchat-owner Snap were falling as companies slowed digital-ad spending in the face of inflation fears, the war in Ukraine and other factors. Twitter had said its board accepted Mr Musk’s offer in part because other parties were unlikely to have the interest or ability to buy the company.

Soon after the deal, as he was lining up financing to pay for it, Mr Musk sold $US8.5bn of Tesla stock over three days. Afterwards, he said he planned to sell no further shares.

The stock sale was unusual, as Mr Musk for years was reluctant to part with Tesla stock to avoid risking his sway over the company — though he sold a large batch late last year, largely to cover tax liabilities from exercising stock options. He remains the automaker’s largest investor, with a stake of around 16 per cent, but he lacks a dual-class of stock ownership that gives founders over some big tech companies supervoting power.

Instead of selling more, Mr Musk planned to borrow against his stake. His original financing plan for Twitter included $US12.5bn from margin loans backed by more than $US62.5bn worth of Tesla shares that he owns. But Tesla’s share price kept falling — vehicle deliveries in China had plummeted amid pandemic lockdowns there and the company said it was facing strong inflationary pressure. That effectively increased the number of shares Mr Musk would have to pledge as collateral for those loans.

Mr Musk reworked the financing plan to reduce that borrowing. About a month after the deal — with Tesla shares now down another 37 per cent from when Mr Musk agreed to buy Twitter — he filed a revised funding plan that eliminated the margin loans entirely. Instead, Mr Musk pledged more equity financing — including billions of dollars that he still needed to secure himself or through outside investors.

Tesla shares have regained a bit of ground, but the outlook for both its business and Twitter’s has dimmed. In May, Mr Musk complained that two new car plants the company was ramping up in Texas and Germany were “gigantic money furnaces.” Early this month, Tesla reported its first sequential drop in quarterly car deliveries in over two years.

Twitter, meanwhile, has gone from its freezing hiring to cutting jobs. On Thursday, it said it laid off 30 per cent of its talent acquisition team.

In the wake of Mr Musk’s regulatory filing, Twitter shares fell 4.81 per cent in after-hours trading Friday to $US35.04, or about 20 per cent below where the stock debuted on public markets in November 2013.

The Wall Street Journal

By the time Mr Musk inked the Twitter takeover deal, Tesla shares were down 19 per cent from their November peak. (Picture: Chris Delmas/ AFP)