On April 14th, Elon Musk, billionaire CEO of Tesla and SpaceX, made an offer to buy Twitter. He wants to take the publicly-traded social media platform private, purchasing 100 percent of the company at $US54.20 per share, an $US8 per-share premium over the stock’s price on April 13th.
This development arrived after more than a month of maneuvering between the richest man in the world and the favored social platform of the media and political elite.
In a March 25th tweet, Musk polled his followers as to whether they thought Twitter adheres to the principle that “free speech is essential to a functioning democracy.” After 70 percent of respondents voted negatively, Musk questioned whether Twitter’s “failing to adhere to free speech principles fundamentally undermines democracy,” and asked, rhetorically, “what should be done?”
Unbeknownst to the public, as Musk tweeted this, he had already begun doing something—he’d been buying up Twitter stock since the end of January. On April 4th, Musk announced that he had purchased 9.2 percent of the company, making him the largest individual Twitter shareholder. Twitter CEO Parag Agrawal immediately offered Musk a seat on Twitter’s board of directors, and Musk responded by striking a conciliatory tone while still emphasizing that he intended to use his new position to push for change at Twitter.
Twitter’s stock price had fallen from a high of around $US70 per share in July of 2021 to below $US33 per share in February after the company missed targets for earnings and user growth in the third and fourth quarters of 2021. But the market responded enthusiastically to the prospect of Musk shaking things up, with the share price increasing by 27 percent on April 4th in response to Musk’s announcement.
Musk began publicly tweeting changes he wanted to make to various Twitter rules, including new policies for distributing coveted blue checkmarks to verified accounts and adding an option to edit published tweets, a feature Twitter had previously refused to implement.
But while the market was excited about Musk, progressive pundits and Twitter staff were less so. Some appeared worried that Musk’s free-speech absolutism would lead to reversing Twitter policies like the banning of former US President Donald Trump from the service, the censoring of medical professionals who expressed doubts about coronavirus vaccines and the suppression of the New York Post’s reporting on a laptop filled with personal and business documents belonging to President Joe Biden’s son, Hunter. When Twitter employees expressed anger over potential changes to policy, a vice president at the newsletter platform Substack mocked Twitter employees fleeing Musk by inviting them not to apply to work at Substack.
In any case, the honeymoon between Musk and Twitter’s management did not last. On April 10th, Agrawal tweeted that Musk had decided not to join Twitter’s board of directors—Musk’s appointment was conditioned on his agreement not to acquire more than 14.9 percent of the company, and a board seat would have come with fiduciary obligations to act in the best interests of the company, which would have prevented Musk from posting harsh criticisms and insults aimed at Twitter and its managers on social media. His decision to back out of the board appointment suggested a more aggressive plan. Agrawal warned of “distractions ahead,” and employees were left “super-stressed” as Musk tweeted that he wanted to turn the company’s San Francisco headquarters into a homeless shelter.
On April 14th, Musk sent his offer letter to the chairman of Twitter’s board of directors. Appended to the SEC filing disclosing the offer is the letter and a script for Musk’s proposal.
Musk is offering $US54.20 a share, which he says is his “best and final offer.” He notes that this is 54 percent higher than the price of Twitter’s stock the day before he started buying into the company and 38 percent higher than the price of the stock on April 1st, the price the company was trading at before Musk revealed that he had acquired his large stake.
Musk also warns that, if his offer is rejected, he will “need to reconsider [his] position as a shareholder.” The script explicitly notes that “this is not a threat,” but, as anyone who has ever seen a gangster movie knows, anytime someone says something is not a threat, it’s always a threat.
Much as with any other market, prices for stocks rise when supply is tight—when there are fewer shares for sale than people who want to buy the shares would like to buy, and prices fall when the number of shares for sale exceeds the appetites of interested purchasers. As Musk bought up nearly a 10th of the company at the same time the company was also buying back its own shares, the supply tightened and the price rose, even as Twitter reported that it missed its earnings and user growth targets in the second half of 2021. If Musk liquidates his holdings, the supply will likely swamp the demand and the share price will plunge.
Further, Musk has warned that “I don’t have confidence in management,” and his filings state that he intends to “express his views to … the public through social media or other channels with respect to [Twitter’s] business, products and service offerings.” In other words, if his takeover is rebuffed, Musk, who has famously insulted US senators who criticized his wealth, is likely to use his enormous platform to bash the company and its management. Musk has 82 million followers on Twitter, and has demonstrated a capacity to move markets with his tweets in the past.
Analysts and pundits were befuddled by Musk’s proposal. Experts in shareholder activism consulted by the New York Times were confused about Musk’s unusual behavior, and speculated that Musk, who is worth $270 billion, might just be toying with Twitter for fun.
Yishan Wong, who worked with Musk at PayPal and was CEO of Reddit from 2012–2014 predicted, however, that running a social media platform might be less fun than Musk anticipates—in fact, he thinks Musk is in for “a world of pain” if he acquires Twitter. Wong says that the free speech ethos of early Internet founders like Musk is out of step with the realities of social media, and the moderation practices Musk says he will abolish are actually essential. Wong denied that moderation policies are biased politically and insisted that platforms are mostly just making rules to keep things operating smoothly. He argued that Musk would be happier if he sticks to launching rockets and dating celebrities than he will be if he wades into social media’s mire of bickering factions and tries to make rules for his platform, which everyone will inevitably be unsatisfied with.
Y-Combinator co-founder Paul Graham agreed that trying to run Twitter would be unpleasant for Musk, but disagreed with Wong’s claim that Twitter is an apolitical platform concerned with minimizing drama. Instead, Graham argued that Musk is trying to take control of a company with 8,000 employees who are mostly progressive and support heavy moderation of right-wing voices. The world of pain Graham predicts for Musk is trying to manage internal dissent as he attempts to change policies to line up with a very different set of values from the current institutional culture.
Musk dismissively responded to Wong’s extended thread of tweets by suggesting that Twitter was overdue for a mechanism to post long-form tweets.
Fellow billionaire Mark Cuban speculated that Musk might be “fucking with the SEC.” Musk has a contentious history with the US securities regulator. In 2018, Musk tweeted that he had secured funding to take Tesla private at a price of $US420 per share. The SEC believed Musk’s statement was misleading, since the deal was far from settled, and charged Musk with securities fraud over the statement. Musk and Tesla ultimately settled with the regulator, paying $40 million in fines and agreeing to appoint new independent directors. Musk also stepped down as Tesla’s chairman.
Since then, Musk has continued to spar with the SEC, with the regulator alleging that Musk has disregarded the terms of the settlement by tweeting things that might influence Tesla’s stock price, while Musk has complained that the SEC is targeting him for investigation in retaliation for Musk’s tweets criticizing government officials. For his part, Musk has shown little respect toward the regulator and its rules. In July 2020, Musk tweeted: “SEC, three letter acronym, middle word is Elon’s”
Musk is facing new regulatory scrutiny over his Twitter maneuvering; Musk was required to make a disclosure within 10 days of acquiring five percent of the company. Musk reached a five percent stake on March 14th, so he should have made his disclosure by March 24th, but he didn’t disclose until April 4th, and he continued buying the stock between March 24th and April 4th. Musk’s April 4th disclosure of his stake spiked the share price to above $US50, so Musk may have saved as much as $US150 million by keeping his activities secret for an additional 10 days after the rules required him to disclose them. After Musk announced his takeover plan, Fox Business reported that the SEC and the Justice Department had launched a “joint investigation” into Musk.
After Musk announced his takeover proposal, the price of Twitter shares declined, which is unusual after an offer has been made to buy all the shares of a company at a premium over the current market price. This may reflect a lack of enthusiasm among investors for Musk’s terms—while his $US54.20 offer is significantly higher than the current market price, it is significantly lower than Twitter traded last summer, and some investors may prefer to hold their shares in hopes that Twitter’s current management will make progress toward growth targets and the share price will recover to those levels or higher.
Investors may also be skeptical that the acquisition will actually occur. Musk’s plan to take Tesla private, which became the subject of the 2018 SEC investigation, never came to fruition, and his proposal to buy Twitter is contingent on his ability to borrow tens of billions of dollars against his stake in Tesla. And Twitter’s board isn’t cooperating with Musk’s plan to take over their company and fire them all.
On April 15th, the day after Musk’s proposal, Twitter’s board unanimously approved a “poison pill,” which would allow the board to issue new shares and offer them to existing shareholders at a discount if a hostile party attempts to purchase more than 15 percent of the company without the board’s approval. This means that Musk’s stake in the company would be diluted by the flood of new shares to other shareholders, and the amount of outstanding shares he would have to acquire to take the company private would increase dramatically. Imagine Twitter’s outstanding shares are a large bowl of cereal, and Musk is trying to eat all of it. What the Twitter board is doing is like dumping a lot more cereal into the bowl.
Musk is known for being unpredictable, but it would make no sense for him to attempt to buy up the company at $US54.20 per share without the board’s approval and with the poison pill in effect, because the cost would be much, much higher than the $US43 billion Musk had planned to pay since he would also have to pay that price for the new shares the board would be issuing to block his acquisition. More likely, he will either deal with the board or abandon his plan to take over the company.
The New York Times reported that Musk is shoring up the financing for his $43 billion offer—much of his wealth is tied up in his companies, so he wants to borrow the money to buy Twitter, using his other assets as collateral. This suggests that Musk may believe he can still pressure the board into accepting his offer, despite their approval of the poison pill. However, The New York Post reported that Musk was considering bringing in other investors to help him buy Twitter. This is significant because it suggests that Musk may be trying to put together a different, possibly higher offer than his original offer to take it private at $US54.20 per share. The board has a fiduciary duty to act in shareholders’ best interests, and to act with loyalty, good faith, and care. If the board attempts to fight off the acquisition, shareholders who support Musk will probably sue them for failing to uphold these obligations. Musk tweeted that if the board rejects his offer, they would be breaching their duties to their shareholders.
However, one major shareholder publicly rebuffed Musk’s terms. The billionaire Saudi prince Alwaleed Bin Talal, who was an early investor in Twitter and has controlled over five percent of the company, tweeted that he did not believe “the proposed offer by @elonmusk ($54.20) comes close to the intrinsic value of @Twitter given its growth prospects.” Musk dryly responded by asking the Saudi prince: “What are the Kingdom’s views on journalistic freedom of speech?” This was a clear reference to the Saudi regime’s abduction and murder of Washington Post journalist Jamal Khashoggi.
Despite Musk’s pointed response to Alwaleed, this argument represents a defense for the board if shareholders sue them for rejecting Musk’s offer. Directors have the discretion to make reasonable business judgments, and are entitled to a presumption that they are acting reasonably that must be rebutted by plaintiffs. As Alwaleed argues, although Musk’s offer is a premium over the current share price, it is lower than Twitter traded less than a year ago, and it is likely within the range of reasonable business decisions for the board to reject it. If Musk’s $US54.20 offer was, as he initially claimed, his best and final, the board could probably fight him off if it wants to (it may still accept the offer), but if Musk comes back with other investors and makes a better offer, the board will be under a lot of pressure to take it, especially since, if the board prevents Musk from acquiring Twitter, the stock will be battered as disappointed investors cash out of the stock, Musk liquidates his stake in the company and the board gets mired in shareholder derivative litigation.
The difference between what Musk and possibly his partners could offer shareholders and the depths the share price may sink to if the board attempts to fight off the takeover and becomes mired in litigation could represent tens of billions of dollars.
One final, somewhat mysterious development that appears to be related to Musk’s takeover attempt is Twitter co-founder, current board member and former CEO Jack Dorsey’s recent Twitter activity. The board’s vote in favor of adopting the poison pill was reported to be unanimous, indicating that Dorsey, who owns about 2.4 percent of Twitter voted for it, but Dorsey, who is friendly with Musk—both of them are prominent Bitcoin investors—publicly criticized the Twitter board over Easter weekend, saying it had “consistently been the dysfunction of the company.” He also tweeted that he wished he could remove the “like” button on Twitter and agreed with a tweet complaining that Twitter’s retweets were “an assault on attention.”
Dorsey also took a swipe at CNN’s Brian Stelter and responded to a tweet from Salesforce CEO Marc Benioff in which Benioff was promoting a magazine article about himself by asking if Benioff had bought the magazine. Dorsey has not publicly commented on Musk’s takeover attempt, but criticizing the board, tweeting about wanting to make dramatic changes to Twitter features, and taking potshots at the media are all things that can be interpreted as suggesting that Dorsey is aligned with Musk.
Dorsey is scheduled to leave Twitter’s board when his current term expires in May, so these tweets may simply reflect the fact that he is feeling more free to express himself with just a few more weeks before his exit. However, Twitter’s share price jumped about 7.5 percent on Monday, April 18th, apparently in response to Dorsey’s tweets criticizing the Twitter board, which the market seems to have interpreted as favorable for Musk’s takeover attempt.
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