Elon Musk's latest genius move
A Sunday wrap-up of takes, legal and otherwise, including mine
I hadn’t weighed in here on Elon Musk’s purported bid for Twitter. But, boy oh boy, have I had some things to say about it on Twitter, where I have been a user since 2008.
Late Thursday I participated in a Twitter Spaces conversation sponsored by Substack, with fellow Substackers Eric Newcomer, Edwin Dorsey, Kyla Scanlon, and David Paolella. Sadly, it was not recorded or reduced to a transcript. However, I noted that many of the remarks we made were later picked up by other media.
What is this all about? I’ll let digital media pioneer David Lat, another Substacker and one of the first guys I met when I started writing, tell you all about it.
(Lat talked to me way back when, after he founded Above The Law for Breaking Media and I had created re:TheAuditors in late 2006, about creating my accounting/audit blog under his group. I decided not to do that and it became Going Concern.)
Speaking of celebrities, Elon Musk—the CEO of Tesla and richest man in the world, with a net worth as of this writing of $264 billion—dominated the business news this week. He made an unsolicited offer to take Twitter private for $43 billion, or $54.20 per share (“a barely veiled marijuana reference,” per the Wall Street Journal). This came after the news that he had acquired a 9.2 percent stake in the social-media giant and was going to join its board—until, well, he wasn’t.
One of the things we discussed on the Twitter Spaces on Thursday is whether Musk’s deal is a troll or a legitimate offer. I said that the terms of this deal, including the inclusion of a “420” joke in the price offered, seemed eerily familiar to his half-hearted and now adjudged fraudulent attempt to take Tesla private in 2018. He wanted to take Tesla private but still give its shareholders a chance to participate and now wants to use same approach with Twitter. That won’t work, I said, quoting law professor Ann Lipton of Tulane from the first time.
Matt Levine of Bloomberg agreed on Friday.
When Musk was pretending to take Tesla private, he pretended that he was going to let all of Tesla's existing shareholders remain shareholders of the new “private” Tesla. This is not a thing, and it was never going to work, but it was a nice friendly promise for Musk to make given that he was never going to take Tesla private. And now he’s doing it again, saying that he will take Twitter private while also keeping as many existing shareholders as he can. Sure buddy!
More than one of us said that Musk has a problem with the financing — which had been obvious to everyone from the get-go — and a few including me mentioned that just because Musk has a lot of company stock owned outright or in the form of options, Tesla along with many other companies prevents executives from borrowing against all of it.
David Lat again:
Whether Musk’s offer will turn into an actual deal is uncertain. Even though he’s the richest man in the world, the financing for his offer is uncertain. Most of his net worth is tied up in Tesla stock, which he’d have to either sell—triggering a big tax bill, and reducing his control over Tesla—or borrow against. But Tesla limits its executives to using no more than 25 percent of their stock as collateral, and Musk has already done a significant amount of borrowing against his shares.
The inimitable Matt Levine at Bloomberg, who has been writing nearly every day about the deal because, well, it makes great fodder for Matt’s tongue-in-cheek takes, had a take on the legitimacy aspect, too:
On Thursday, for my sins, Elon Musk announced an offer to buy Twitter for $54.20 per share in cash. 420 is a weed joke.
I suppose this increased the probability that Elon Musk will buy Twitter? By a little? Yesterday Twitter’s stock managed to close down 1.7%, at $45.08, suggesting that the market puts a somewhat lower probability on Musk buying Twitter after he formally proposed to buy Twitter than it did before.
Musk has some history here: In 2018 he pretended that he was going to take Tesla Inc. private; he wasn’t, and eventually he settled fraud charges with the U.S. Securities and Exchange Commission. Ordinarily if a billionaire chief executive officer of a public company offers to buy a company, the odds that he is kidding are quite low. When it’s Elon Musk, the historical odds are, like, 50/50. (He really bought SolarCity.)
He really bought Solar City but many have since told the Delaware court they they think that had fraudulent intent, too. Matt had something to say about the funding part, too:
Musk will need about $40 billion to buy the 91% of Twitter that he does not currently own at $54.20 per share. He owns about 172.6 million shares of Tesla Inc. stock, worth about $170 billion at yesterday’s closing price, plus more shares underlying stock options. He has pledged about 88 million of those shares to secure personal loans, but if he sold the other 84-ish million that would raise about $60 billion after tax, more than enough to pay for Twitter. That would be a pretty extreme move, though. Musk seems to … enjoy … Tesla, and dumping half his stock would both (1) drive the stock price down a lot and (2) signal to the market that he has found a new toy and lost some interest in Tesla. That seems impulsive even for him, though he did sell about 10% of his Tesla stock late last year sort of due to a Twitter poll so it is certainly possible. Tesla’s stock closed down yesterday, I guess on the threat of massive sales.
I said on the Twitter Spaces Thursday that the price was too low, since it did not even reach the 52-week high. Levine agreed on Friday and adds in something about how none of the existing shareholders especially a whopper one, want Musk to own Twitter.
One problem with Musk’s offer is that it is pretty low. Musk points out that $54.20 “represents a 54% premium” over where he started investing in Twitter, and a 38% premium over where the stock was before he announced his position. But Twitter was in the $60s in October, and a lot of its big long-term holders seem unlikely to be sellers at $54.20. “‘No board in America is going to take that number,’ said Jefferies analyst Brent Thill.”
And here are the Saudis:
Saudi Arabia’s Prince Alwaleed bin Talal rejected Elon Musk’s bid to acquire Twitter Inc. for $54.20 per share, saying the deal doesn’t “come close to the intrinsic value” of the popular social media platform. …
A 2015 regulatory filing showed that Alwaleed, along with his Kingdom Holding Company, owned a 5.2% stake in the social media platform. The Bloomberg Billionaires Index estimates the position is now about 4.4% of Twitter.
This is notable because, when Elon Musk pretended that he had financing to take Tesla private, the Saudi public investment fund was who he pretended was providing the financing. In fact, on Tuesday I made a grim joke about the Saudis providing pretend equity financing for Musk to pretend to buy Twitter. Apparently not!
To be fair to Musk, in this deal, he is not pretending to have financing. His offer to Twitter’s board is contingent on “completion of anticipated financing,” and when Musk answered questions at that conference yesterday, one of the questions was of course “do you have funding secured,” and his answer was “I have sufficient assets.” Which means no! “Yes” means yes. “I’m really rich, surely someone will give me the money” means no one has yet.
(I am not a big Bin Talal fan. In all my years of writing he is the only guy that has ever sued me. Fortunately it was an unsuccessful suit, I was a tangential defendant, and Forbes defended me and got out of it with no monetary damages and no retraction. Here’s my piece of the package about Bin Talal which is still up, unchanged.)
Everyone on our Twitter Spaces, but especially David Paolella, formerly with Guggenheim Partners who writes The Special Situations Report, said Twitter must and would create a “poison pill” defense to Musk’s overtures. David was also very good at explaining the difference between the two takeover tactics, a “tender offer” and a “proxy vote”. Musk is attempting a tender offer here because he is too late for a proxy initiative and that would have been helped by his taking a board seat, which he decided not to do because it is too much work and he’d rather take his case to the masses with Twitter polls.
Lo and behold mid-day Friday Twitter announced it had adopted a poison pill. Here’s David Lat, explaining:
In addition, Twitter just adopted a shareholder rights plan aka poison pill, a common step taken by companies threatened with takeovers. Under the terms of the plan, if anyone acquires 15 percent or more of Twitter’s outstanding common stock in a transaction not approved by its board, existing shareholders (except the would-be acquirer) can purchase new shares of Twitter—immediately diluting the prospective acquirer’s stake, making it very difficult to buy the rest of the company.
(When Matt published early Friday morning the poison pill had not yet been announced. It’s a never ending roller coaster…)
I will admit I think more like David Lat, who looked up the lawyers working on the deal. I, too, spied the unexpected pair on Musk’s Twitter filings.
Who has the pleasure of representing Elon Musk in this deal? In litigation matters, his go-to lawyer is Alex Spiro of Quinn Emanuel, but for the Twitter maneuvering, he has turned to McDermott Will & Emery. It’s an interesting choice, since MWE is more well-known for private-equity deals rather than big-ticket transactions involving public companies. (It’s not in the top ten of either the Bloomberg or Mergermarket M&A league tables for 2021, when ranked by deal value.)
The Twitter takeover fight is therefore an excellent opportunity for McDermott to shine. If all this drama ends with Musk taking Twitter private, MWE will deserve major props for closing a complex deal involving a major company, a financing challenge, and an infamously difficult client.
Specifically, Musk is using Heidi Steele and John Lutz from McDermott Will & Emery, a Chicago firm. As Lat, mentioned they are not know for these kinds of deals and well, Chicago. Is it like his D&O insurance where few professionals want to work with him because he’s high risk?
I also mentioned on the Twitter Spaces that the whole thing, like the original “420” Twitter take private, may be just a big diversionary tactic from Musk’s myriad other legal and regulatory problems. It sure is beginning to seem like it.
Billionaire Tesla CEO Elon Musk acknowledged Thursday at the TED2022 conference in Vancouver that he is “not sure” he’ll actually be able to buy Twitter. The comments came hours after a regulatory filing revealed that he offered to acquire the company for $54.20 per share, or about $43 billion.
Lutz and Steel are pros — she is an M&A partner and Lutz is more a tax guy — but this was the last deal Lutz and Steele worked on together, as part of a larger team.
International law firm McDermott Will & Emery represented INX Limited in its initial public offering of up to 130 million INX Tokens at a purchase price of $0.90 per Token. The offering was declared effective by the Securities and Exchange Commission (SEC) on August 20, 2020 and INX consummated an initial closing on September 14, 2020, after receiving purchase commitments that exceeded the offering minimum. This is the first public offering of blockchain assets registered under the Securities Act of 1933.
I have written a lot about tokens. Not a big fan…
One other flyer on the deal I took on Twitter a few days ago and in the Twitter Spaces on Thursday is the tax angle. Gotta play to win…
Someone didn’t like that take when I mentioned it in Twitter Spaces but he did not listen carefully.
We shall see!
© Francine McKenna, The Digging Company LLC, 2022