Dud deal: The real problem for Musk’s Twitter

Anointing yourself the guardian of free speech is one thing. Living up to it is something else altogether, as Elon Musk is quickly discovering.

It’s been just over a week since the Tesla tycoon took over Twitter and already it looks like the entire thing is in danger of coming apart at the seams.

Having fired the board – a hasty act, even for someone as impulsive as Musk – it is surely beginning to dawn on him that there will be no quick fixes in his effort to prevent the $US44 billion ($69 billion) buyout turning into one of the worst deals of all time.

Elon Musk’s biggest problem is how he structured Twitter the deal.Credit: AP

Sacking the executives who had held Musk to a bid he tried to wriggle out of was the easy part. Everything else that has been floated as a magic solution to Twitter’s problems amounts to little more than throwing darts at the wall. He has even resorted to crowdsourcing business ideas, a pretty clear sign that he is short of his own.

Musk’s biggest problem is how he structured the deal. He wildly overpaid; the debt that financed it will be hugely expensive; and it was horribly timed, too, coming just as the world’s central banks slam the door shut on a decade of free and easy money. It has all the hallmarks of a classic private equity style leveraged mega-buyout, the sort that so often goes spectacularly wrong when billionaires believe their own hype, get far too excited and bite off more than they can chew.

Not for the first time for a man who once called a heroic cave diver “pedo [sic] guy”, Musk has allowed ego and bravado to get in the way of old-fashioned common sense.

For Musk to stand any chance of success he has to persuade advertisers, who account for roughly 90 per cent of Twitter’s turnover, to stick around.

There is a wealth of academic research showing that mergers and acquisitions rarely end well, often for neither acquirer nor acquired. But large-scale, heavily debt-fuelled, top-of-the-cycle deals have a tendency to blow up spectacularly. When Musk first pounced on Twitter back in April, his admirers marvelled at his audacity and the speed with which he moved.

In just 12 short days, Musk not only convinced Wall Street to furnish him with the financial wherewithal for the biggest take-private deal since the 2016 purchase of data storage giant EMC by Dell for $US67 billion, he managed to persuade an initially sceptical board to throw their weight behind the bid too.

It was hailed in some quarters as yet another example of Musk’s maverick brilliance. It is looking decidedly less brilliant now. Roughly half of the $US13 billion loans that has been piled onto Twitter’s balance sheet is of the floating rate variety, meaning that as the US Federal Reserve continues to ratchet up interest rates, the interest bill on its debt mountain shoots up too.

A consortium of lenders, led by Morgan Stanley, Bank of America and Barclays, have conceded they will be stuck holding the debt on their books for months or perhaps longer, and will probably end up incurring huge losses, according to the Financial Times.

As a result of tightening credit conditions, analysts at research firm CreditSights have calculated that Twitter’s annual interest burden will rocket from less than $US100 million a year to somewhere in region of $US1.2 billion, and that was before the Fed lifted rates by 0.75 percentage points for the fourth time in a row last week in its ongoing attempt to tame inflation.

That would be a pretty hair-raising jump for any company but in the chaos of Musk’s tussle for control it is easy to overlook the fact that Twitter has rarely made a profit since going public in 2013, nor does it look like doing so any time soon. The company lost $US221 million last year and has posted a net loss every year since joining the New York stock exchange, except in 2018 and 2019 when it made a profit of $US1.2 billion and $US1.5 billion respectively.

And yet for the maths to even begin to stack up, Twitter needs to increase revenue and expand margins quickly. That will be a huge challenge – hence the sense of outright chaos that has engulfed the company in recent days.

For Musk to stand any chance of success he has to persuade advertisers, who account for roughly 90 per cent of Twitter’s turnover, to stick around despite concerns that Musk’s attempt to boost free speech ends up increasing instances of hate speech.

The omens aren’t great. General Motors, Volkswagen and Pfizer have already suspended spending on the platform. As the advertising mogul Martin Sorrell told Bloomberg: “Clients don’t want conflict, they don’t want controversy.” Musk has admitted that there has been “a massive drop in revenue”, which he blamed on “activist groups pressuring advertisers”.

Meanwhile, he appears determined to press ahead with a plan to charge an $US8 monthly subscription fee for a coveted blue tick that bestows “influencer” status – but as many Twitter users have pointed out, that’s not most people’s idea of free speech.

The Telegraph

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