Musk is wrong for Twitter even if the deal math works

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It looks like Twitter Inc. will sell itself to Elon Musk for $43 billion, which would make the deal one of the largest leveraged buyouts in Wall Street history and give the steward of Tesla Inc. a powerful perch on social media. , however, so are Musk’s intentions. These two factors promise to make this deal a potential disaster and will force investors, managers, users and society to think more clearly and seriously about the role that social media companies play in an era marked by viral propaganda and misinformation.

LBOs typically involve taking publicly traded companies private by putting them into debt and using their cash to repay those obligations. Along the way, companies that take over companies are expected to make their targets more competitive and innovative. That’s the theory, anyway. The wave of buyouts that began in the 1980s and peaked in 2007 was littered with deals gone wrong. The LBO landscape calmed down after the 2008 financial crisis, but good returns for investors and low interest rates have taken deals to new heights in recent years. If Musk traps Twitter, it will inevitably become a star case study in the effectiveness of LBOs.

Of course, Musk’s presence means the takeover isn’t just one thing, so let’s look at the math. Musk says he’s pledging $21 billion of his own money and will likely sell some Tesla stock to raise those funds. Banks will lend him $12.5 billion, secured by another $62.5 billion of his Tesla stock. The remainder of the purchase price and other costs will be funded by $13 billion in debt that Twitter will assume. Read my colleague Matt Levine for a more detailed accounting, but ultimately Twitter will have about $1 billion in interest payments due each year.

Could it be manageable? It’s a close call. Twitter’s projected cash flow (the money it carries before considering interest, taxes, depreciation and amortization) is expected to be around $1.43 billion this year and $1. $.85 billion in 2023. So debt payments will eat up a huge chunk of Twitter’s cash flow. Homeowners underwater on a big mortgage and related interest payments will be able to sympathize with the financial wedge that Musk might put Twitter in. Musk will also have about $1 billion in interest payments to pay, and if Tesla shares run into trouble he could be in a rush, but let’s put his wallet aside for now. Twitter itself is going to have to go full throttle to make the kind of money it needs to be both profitable and self-sufficient.

So there will be pressure on Musk to make the finances work. He is said to have big plans to do so, which so far seems to amount to an undisclosed game he recently showed off to his backers. But he also said he wasn’t interested in Twitter for economic reasons, which gave some potential financiers pause. The deal “wouldn’t make much sense to most private equity investors,” according to Bloomberg News.

But Musk influenced Morgan Stanley, Bank of America Corp., Barclays Plc and other big players, in part because of what Bloomberg News described as his “enthusiasm for the deal.” Enthusiasm only gets you so far, but big institutions like Morgan Stanley have likely done their due diligence. Or maybe they also want to stay in Musk’s good graces in order to be in a good position to get some business flow from Tesla? Maybe a bit of both? Time will tell us. Investors expressed some optimism, rising the stock price more than 3% on Monday, although it was still below the offering price of $54.20 per share.

Musk still hasn’t provided meaningful details on exactly what he will do to rev up Twitter’s engines. He was an effective and bold leader at Tesla – but Tesla makes electric vehicles; it is not a media company. Managerial prowess often doesn’t translate to different types of businesses. And media companies have found the digital age difficult, with advertising evaporating or finding new channels and subscription revenue hard to capture.

Media companies also provide a public service. In an ideal world, responsible media companies keep users informed, monitor the use of power and the evolution of society, and provide forums for ideas. Musk has used social media to play games with his business interests, troll those he doesn’t like, and break the law and regulators. None of this is a recipe for enlightened media management. As we’ve also learned from Facebook and Twitter’s myriad struggles with monitoring propaganda and misinformation, social media companies need to do a better job of fact-checking information on their platforms. Musk shows no signs of being up to the task.

Yes, it’s fascinating to watch Musk do his job and interesting (and often disturbing) to see how badly he breaks along the way, but media companies matter. They shape public dialogue and private conversations. And the price of buffoonery and delinquency is over $43 billion.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Timothy L. O’Brien is a senior columnist for Bloomberg Opinion.

More stories like this are available at bloomberg.com/opinion

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