Musk wants to buy Twitter altogether. Can he buy it?

Musk's heart is known to everyone. When he refused to join the board of Twitter on Saturday, there was already speculation that he might acquire the world's most influential social media. Because previously, Twitter invited him to join the board on the condition that Musk could not own more than 15% of the shares and did not seek to acquire a controlling stake.

Sure enough, just a few days later, the world's richest man filed with the Securities and Exchange Commission (SEC) that he planned to buy Twitter for $54.20 a share, turning it into a private company. The offer values Twitter as a whole at $43 billion.

The richest man doesn't say much.

Musk attached a letter of offer he wrote to Bret Tylor, the independent chairman of Twitter and co-CEO of Salesforce.com Inc. The open letter is very short, but unusually tough. People are ruthless and don't talk much, which is very in line with his style.

"I invested in Twitter because I believe in its potential as a global platform for freedom of expression, and I believe that freedom of expression is the basis on which democracy works. But after investing, I now realize that Twitter can neither prosper nor fulfill this mission under the current mechanism. Twitter needs to be transformed into a private company. As a result, I plan to buy all shares in Twitter at $54.2 a share in cash, a 54% premium to my pre-investment share price and a 38% premium to my pre-investment share price. This is my highest and final offer. If it is not accepted, I will reconsider my status as a shareholder. "

The core sentence of the whole letter is the last sentence, "Twitter has great potential, and I will unlock it." There are only 138 words in this open letter, but there are 11 "I" in it. This unvarnished vernacular language and self-centered narrative style have a lot in common with former US President Donald Trump, who even wrote the official announcement as a tweet.

He also attached a transcript of his communication with the Twitter board in the document. "as I said over the weekend, I believe Twitter should go through the necessary change as a private company." After thinking about it over the past few days, I decided to buy Twitter and privatize it. I'm not going to negotiate back and forth. I'm going to be straightforward. This is a high offer. Your shareholders will like it. If this offer does not work, given my lack of confidence in management, I do not believe that I can push for the necessary changes in the open market. I will reconsider being a shareholder. It's not a threat, but without the changes needed, it's not a good investment. These changes cannot be made without privatizing Twitter. "

If you don't like it, buy it.

As we all know, Musk is a heavy user of Twitter with more than 81 million followers. As a global business leader with an extremely busy agenda, he tweets almost every day. And unlike other entrepreneur public relations tweets, Musk's tweets are full of strong personal colors, laughing and cursing, and unscrupulous. Musk is Twitter's most influential non-entertainment celebrity after Trump was blocked on Twitter for inciting riots in Congress.

As a heavy user, he has a lot of dissatisfaction with the Twitter platform. Over the past few months, Musk has complained publicly about the Twitter platform, ranging from specific features to mocking management to content censorship standards. He publicly blasted Twitter's overly stringent censorship standards for damaging freedom of expression, the cornerstone of democracy. This argument coincides with American conservatives. They have long accused Twitter of being biased and suppressing the voices of conservatives.

As the richest man in the world, Musk decided to put his discontent into action. Since the end of January, he has quietly bought 73.5 million shares of Twitter common stock, or 9.1%, for $2.6 billion on the open market, making him the largest shareholder in Twitter. After the disclosure, Twitter had to invite him to join the 11-member board in an attempt to "appease" the elusive richest man in the world.

Last Saturday was supposed to be the day Musk officially became a Twitter director, but he unexpectedly turned down the invitation again. It was clear that Musk had made up his mind at the time to turn Twitter into his own private company and reshuffle management to achieve his goal of change.

Do you really have cash to buy it?

So can Musk really buy Twitter altogether?

First, let's see if Musk has the money to buy Twitter. All-cash acquisitions are not uncommon, but it is extremely rare for super-rich to pay tens of billions of dollars out of their own pocket. Mr Musk did not make it clear that he had received financing or had enough cash, saying only that the deal needed to be completed "as expected". He has hired Morgan Stanley as the financial adviser for his acquisition.

Musk is currently worth more than $270 billion, and his current stake in Tesla, Inc. is worth $176 billion, and there are still a large number of unexercised options. It is sufficient in terms of total assets. But importantly, Mr Musk does not have much cash on hand, which is the main reason he sold his shares in Tesla, Inc. at the end of last year because he had to pay taxes to exercise his options.

Selling Tesla, Inc. to cash out is of course the simplest means of financing. But when Musk is in urgent need of money, he doesn't need to sell and cash out directly. Because he can use Tesla, Inc. shares to mortgage financing. Tesla, Inc. allows management to pledge up to 25 per cent of their shares, and Mr Musk held 172.6 million Tesla, Inc. shares at the end of last year and had the right to buy 60 million shares, according to regulatory documents.

The regulatory documents also show that Musk has mortgaged 88 million shares of Tesla, Inc. for personal loans. That means his current credit line for mortgaged shares is no longer enough to meet the $39 billion needed to buy Twitter (he already owns 9.1% of Twitter) and has to find new sources of financing.

Musk also owns nearly half of Space X, a stake worth more than $35 billion. He had previously admitted to holding cryptocurrencies with unknown amounts, including Bitcoin, Ethernet Square and dogcoin. So if the world's richest man is really determined to buy Twitter, his personal fortune is enough. At the previous TED 2022 event, Mr Musk was confident that he had enough assets to afford the deal.

The offer is unattractive.

Second, can he really buy Twitter? Even if Musk has the money to buy it, Twitter shareholders have to be willing to sell. After Musk announced plans to buy Twitter in its entirety, the Twitter board announced that it would consider Musk's offer. But this does not represent any official position, it is just the usual practice of the board of directors of listed companies to respect the value of shareholders.

Although Twitter is the most influential social media platform in the world, Twitter does not show corresponding revenue and business value. It currently has a market capitalization of only $40 billion, or even 2/3 of that of Snap Inc, a teenage social platform, and is a far cry from social platforms such as TikTok, LinkedIn and Instagram.

Unlike Internet companies such as Alphabet Inc-CL C and Meta, Twitter's ownership structure is very fragmented. Musk was the largest shareholder for just $2.6 billion, while co-founder Dorsey was already the sixth-largest shareholder with a 2.25% stake. Moreover, Twitter does not have a super-voting structure, and Musk can get enough voting rights if he continues to increase his stake.

Who are the main shareholders of Twitter? Position data at the end of last year showed that Twitter's top shareholders Vanguard, Morgan Stanley, Blackstone Group Inc Group and StateStreet were all institutional investors, with shareholdings of 8.8 per cent, 8.4 per cent, 6.5 per cent and 4.5 per cent, respectively. It is worth noting that Morgan Stanley is not only the third largest shareholder of Twitter, but also the financial adviser of Musk's acquisition of Twitter.

But the low offer may be one of the reasons Twitter shareholders hesitate. Although Musk thinks his offer of $54.2 a share represents a 38% premium to the share price before he disclosed his holdings, Twitter's share price is now around $48, and his offer is clearly not very attractive. And Twitter shares are at a low ebb, reaching as high as $77 at the beginning of last year, and investors may not think a $54.2 sale is a good time.

Prince Alwaleed bin Talal of Saudi Arabia, a major shareholder in Twitter, has said publicly that he will reject Musk's offer on the grounds that the offer is too low. "given Twitter's growth prospects, I don't think Musk's offer of $54.2 a share is close to the intrinsic value of the company. CNBC TV channel commentator Jim Cramer also believes that Twitter's board of directors will not hesitate to reject the offer.

Or suffer a collective boycott.

Third, is the Twitter board willing to sell? It seems that the Twitter board does not appreciate Musk. Twitter's board of directors is considering a poison pill to prevent a hostile takeover by Musk, according to US media reports. Poison pill plan is a common means for listed boards to resist hostile takeovers, selling a large number of shares to existing shareholders through equity dilution in order to increase the cost of hostile acquirers.

If Musk is planning a hostile takeover, then the launch of the poison pill by the Twitter board or the search for a white knight (introducing new strategic investors) will greatly increase his acquisition costs, forcing Musk to abandon the acquisition.

More importantly, Musk's reason for buying Twitter is to promote freedom of expression, which means he plans to relax Twitter's current content control rules, relax controls on false and seditious information, and may even restore former President Trump's account. There is no doubt that this will be strongly resisted by Twitter management and employees.

Twitter is headquartered in San Francisco, and its management and employees are dominated by liberals. Twitter invited Musk to the board last week, which has caused concern among many employees. Twitter CEO had planned to hold a meeting this week for employees to ask Musk questions directly.

Now that Musk is planning to buy all of Twitter, it is more likely to trigger a boycott by Twitter employees. Twitter will hold a plenary meeting to discuss Musk's offer. In the equality-minded culture of Silicon Valley Internet companies, a collective employee boycott means that the outlook is bleak.

Mr Musk clearly foresaw his unpopularity. He tweeted a few days ago, openly pressuring the Twitter board. He said that if the board rejected its offer directly and did not submit it for a shareholder vote, it would be against the interests of shareholders. Twitter belongs to shareholders, not the board. In addition, Musk also said that if rejected by the Twitter board, he has a plan B.

Administrative veto is the deadliest.

Finally, there is another factor that cannot be ignored and is likely to be decisive. If Musk really wants to take a hostile bid for Twitter, the Biden government is likely to veto the deal directly. In 2018, the Trump administration rejected Broadcom Ltd's $120 billion hostile takeover of Qualcomm Inc on national security grounds, on the grounds that the deal could threaten Qualcomm Inc and even the United States' ability to innovate in mobile communications.

Over the past few years, the Democratic Party has been emphasizing the social responsibility of social media, pressuring social platforms such as Facebook Inc and Twitter to strengthen content management on their platforms, cracking down on false information and inciting hate content. Musk's demand for "freedom of speech" is undoubtedly at odds with the Democratic administration, and will also be subject to regulatory pressure from the Biden administration and Democratic members of Congress.

If Musk finally turns Twitter into his own private company, he will reshuffle Twitter management as he wishes, significantly change the current platform rules and loosen control over controversial content. This is undoubtedly a situation that Republicans would like to see, but it will also be strongly rebelled by the Democratic administration. Biden's White House also has executive veto power over major acquisitions.

Even Musk himself admits that he is not sure whether he can buy Twitter, nor does he care about making money on Twitter. What he cares about is "the importance of building a platform for freedom of expression that can accommodate all parties". Because Twitter has become a "de facto city square" (that is, public space for speech).

Last but not least, why did Musk come to this acquisition gesture if he knew it would be difficult for him to complete the Twitter acquisition? Perhaps only Musk knows the real reason.

Perhaps he is really a pure libertarian who regards "freedom of speech" as the highest criterion. Perhaps for a few years, Musk spoke unscrupulously on Twitter, sparking a lot of controversy, even fraud and libel lawsuits. He excuses and defends himself with "freedom of speech".

On the other hand, Musk paid $2.6 billion for a 9.1% stake in Twitter, which has now appreciated by more than 30%, and he has made a return of $900 million from an investment perspective alone. Even if the prospect of his acquisition of Twitter is bleak, there is not much loss for Musk, but for himself to do another "defend freedom" image of public relations.