What are the next steps in Elon Musk’s Twitter takeover?
Elon Musk is very likely to acquire Twitter – despite the fact regulators and shareholders are yet to approve the deal, writes UNSW Business School's Mark Humphery-Jenner
Twitter’s board has agreed to Elon Musk’s takeover offer. Musk has offered $54.20 per share, valuing Twitter at around $44 billion. Let us look at what has happened, what still needs to happen, and whether the offer price looks reasonable.
What has happened?
This came after a tumultuous period. Musk had acquired 9.2 per cent of Twitter’s shares. He was to join Twitter’s board, then demurred. Thereafter, he launched a takeover bid, which the board blocked with a Poison Pill. Musk responded to this by pursuing a hostile tender offer, bypassing the board. However, with no competing bidder coming forth, and no competing plan from Twitter’s board to create value, he met with the board. This culminated in the board acquiescing to the bid.
Musk intends to finance the bid using his own equity and debt. He has secured around $25.5 billion in debt financing. He has also raised his own equity, totally around $21 billion. Shareholders would receive cash upon completion of the bid. While he has signalled a willingness to retain some shareholders after Twitter goes private, details are unclear, and it is not certain this is practical given Musk’s objectives are opaque.
What is still to happen? Are there roadblocks?
The acquisition still requires regulatory and shareholder approval. These are unlikely to sink the deal. However, they are not trivial.
The SEC must approve takeovers for them to proceed. The SEC has not signalled whether it would deny this takeover. Musk has had negative interactions with the SEC, especially surrounding his tweet that he had funding to take Tesla private, which he asserted was in jest. There are some side concerns about whether Musk disclosed his Twitter holding in a timely enough manner and whether he should have filed a 13D filing as an activist investor. Nevertheless, it is unlikely to stop a deal that shareholders approve. Rather, the SEC might impose conditions on the bid.
Anti-trust and competition regulators might scrutinise the bid. However, it is unlikely that they would block it. This is because Musk has little other financial interest in other tech companies. Thus, it is not clear that this would be anti-competitive. Concerns about ‘free speech’ are a footnote in this discussion. Myriad other platforms exist to promote free speech. And, twitter has minor competitors. Thus, even if regulators wished to construe their role as ensuring free speech in this sector, it is unlikely they would have cause to block the bid.
Shareholders must also approve the deal for it to proceed. This appears to be very likely. Some shareholders have disclaimed the deal. However, this appears to represent a small cross-section of shareholders. Indeed, there had been increasing pressure on the board to consider the takeover, and let shareholders vote, lest the board breach their fiduciary duties. The lack of competing bidder, or alternative plan to create value from the board, would seem to imply that shareholder approval is more likely.
Is this a “good” price?
Whether a price is good is an individual decision. Shareholders might make that decision in conjunction with their financial advisor. However, we can consider some Twitter metrics to better inform any decision.
The takeover premium appears solid. Musk has priced twitter at $54.20 per share. This is 18 per cent above the price before the takeover bid, 38 per cent above the price on 1 April, and around 50 per cent above the price before Musk accrued shares. This is on the upper end of takeover premiums. Twitter has not traded above $54.20 during 2022.
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Twitter briefly traded above $70 in 2021; however, this is not indicative. Twitter was only briefly above $70 per share. However, Twitter quickly fell. Further, Twitter is not profitable, giving it a negative price-to-earnings ratio. The broader tech sector has also seen significant declines both during the latter part of 2021 and in 2022. Clear examples include Meta (formerly Facebook) and Snap. These companies have signalled continued earnings pressures. Twitter would suffer similar pressures. Thus, it is incorrect to merely observe that twitter was once above $70; and thus, that is what the bid price should be. Fundamentals change over time and there is an argument that the $70 was not well supported at that time.
Twitter’s board has not disclosed an alternative plan. If a board is to resist a takeover, it should demonstrate how it intends to create more value and/or why its management is better for shareholders. The board can present non-financial benefits and can let shareholders decide whether they value those benefits. However, the board had not disclosed how it would create more value on a risk and time-adjusted basis than Musk’s offer. Similarly, no competing bid had become public.
Thus, it is not clear that a competing bidder would have pushed the acquisition price higher. Therefore, the board had not clearly demonstrated how shareholders would have achieved a better result than accepting this takeover offer.
Where does this leave us?
Musk is very likely to complete the acquisition for Twitter. Regulators and shareholders are still yet to approve the deal. The latter is very likely to vote in favor. However, nothing is certain. The former is unlikely to block the deal unless a significant red flag presents itself. However, they could impose conditions. At present, neither the board, nor a competing bidder, has demonstrated that they would create more value than this takeover bid. This is something shareholders would want to consider when evaluating the deal.
Mark Humphery-Jenner is an Associate Professor in the School of Banking & Finance at UNSW Business School. He has been published in leading management journals and his research interests include corporate finance, venture capital and law. For more information please contact A/Prof. Humphery-Jenner directly.