Opinion: Twitter could see a rough ride with a mass employee exodus from San Francisco
By Ryan C. Smith
Special for examiner
As the dust begins to settle since Elon Musk’s acquisition of Twitter, many questions arise about how the world’s richest man — worth an estimated $239 billion after buying Twitter — obtained the $46.5 billion in financing necessary for the $35 billion takeover of the social media giant.
What makes these matters urgent is Musk’s reputation for unpredictable behavior. It’s a reputation entirely sealed, thanks to the run-ins with the Securities & Exchange Commission for tweets considered stock market manipulationconcerns from Tesla investors that his new acquisition will distract him from running the business and a Wednesday tweet offering to buy Coca-Cola, estimated at $265 billion. “Then I buy Coke to put the cocaine back in,” Musk wrote on his favorite social media platform.
Meanwhile, a review of SEC filings relating to the Twitter deal shows Musk’s purchase has considerable support from influential financial figures. This may ensure that credit is available to make the purchase, but it also means Musk’s debtors have considerable leverage to protect their interests. How it works is illustrated in the structure of the loans used to buy Twitter.
Three different forms of financing were used to acquire Twitter. It was a bridge loan, a margin loan and an equity financing. Bridge loans are a form of short-term financing used to cover costs until a business or individual receives a more permanent source of capital and are based on the perceived creditworthiness of the borrower. Margin loans, on the other hand, are borrowed against the value of an existing asset, such as stocks. This makes them vulnerable to fluctuations in the value of the underlying asset which, if it drops too low, can trigger a margin call, resulting in the loss of the underlying asset. Equity financing, the third and most important part of the operation, relies on the sale of existing assets to cover expected costs.
Of these, bridge loans and margin loans both required the support of outside banks. In the case of bridging loanMusk was able to secure up to $6 billion in funding through a syndication of loans made up of Morgan Stanley Senior Funding, Bank of America NA, Barclays Bank PLC, MUFG Bank Ltd., BNP Paribas, Mizuho Bank Ltd. and Societe Generale. The margin loan had an even larger group of interested parties, consisting of all the banks involved in the bridge loan and the addition of the Credit Suisse branch in the Cayman Islands, Citibank, Deutsche Bank, Royal Bank of Canada and the Canadian Imperial Bank of Commerce.
These banks provided $12.5 billion in funding secured with an estimate of $62 billion in Tesla shares. All participants in both are among the 50 largest banks in the worldand all participants in the margin loan would be entitled to a portion of Musk’s Tesla shares in the event of default on the loan.
The third source of funding, estimated $21 billion in SEC filingswas Musk equity commitment through the sale of Tesla shares. Musk, at the time of writing, has sold an additional $8.5 billion as part of the coverage of this commitment. The sale of about 9.6 million shares coincides with recent declines in Tesla’s stock value, which worries investors.
These concerns are likely based on the impact selling that many shares would have on Tesla’s share price. While Tesla’s recent price drop isn’t the company’s worst this year to date, this still represented a $125 billion loss to the company’s net worth. The precise details of this margin financing are not yet public, making it unclear what stock price would jeopardize this deal. But if some form of financing fails, according to SEC filings, then the deal would be null and void.
If it passes, however, Elon Musk will be America’s most indebted CEO. The purchase of Twitter will be based on $18.5 billion in debt, bringing the estimated debt-to-value ratio to approximately 52% of Twitter’s overall value. It could raise concerns for San Francisco that Musk would be forced to carry out an asset stripping to pay those fees, especially if the margin loan fails and Musk is forced to surrender his shares to his creditors.
Then there is the question of what will happen to employee stock options. Many tech companies use long-term stock acquisition agreements as a tool to retain talent with the promise of significantly higher future pay beyond base pay. Audio of a pre-buyout meeting of Twitter executives showed this to be a significant concern for employees and management of the company, with a discussion of the possibility of a direct stock gain for all shares currently vested. The same audio also saw the possibility of a “mass exodus” of employees in direct response to the acquisition.
For now, it looks like Elon Musk has enough resources to pay for his purchase of Twitter. The impact of this purchase on his existing properties and on Twitter remains to be seen. So only time will tell if the funding deals Musk struck will hold up or if his acquisition will result in a loss of vital talent from the San Francisco social media giant.
Ryan C. Smith, Ph.D., is an economics researcher specializing in the international oil industry, global finance, supply chains and the Middle East. He lives in San Francisco.