What I’ll tell you is that based on the analysis and the perception of risk, certainty, and value, the board unanimously decided the offer from Elon represented the best value for our shareholders.
- Bret Taylor, Chairman of Twitter, as reported by The New York Times
Episode Summary
In this week’s Dial P audio podcast, Kelly Barner answer the question so many of us have been thinking since the news broke on April 25th that Elon Musk and Twitter had come to an agreement to allow the company to be taken private: What happens now?
We’ll leave the social and journalistic implications to the pundits, but buying a company as big as Twitter is far more complicated that buying a Tesla. There are layers of review, votes, and a few unknowns before the deal is completely done.
By examining primary sources and recent news coverage, Kelly explains all of the business details and behind the scenes machinations that will have to come to pass before the world’s richest man becomes the outright owner of Twitter.
Episode Transcript
Intro/Outro (00:01):
Welcome to dial P for procurement, a show focused on today’s biggest spin supplier and contract management related business opportunities. Dial P investigates, the nuanced and constantly evolving boundary of the procurement supply chain divide with a broadcast of engaged executives, providers thought leaders give us an hour and we’ll provide you with a new perspective on supply chain value. And now it’s time to dial P for procurement.
Kelly Barner (00:32):
Hi there, and thanks for joining me for dial P for procurement. Part of the supply chain. Now family of shows, I’m Kelly Barner, a career procurement practi with a love for business news, and most of all good ideas, no matter where they come from. In addition to video interviews and live streams, I’ll join you each Thursday to share my point of view on a current news story, especially ones that present an interesting twist for business leaders, or in some cases, we’ll take a new way of looking at a common challenge. Before I dig into this week’s topic, we’re building out dial PS independent following. So no matter where you encountered this podcast, I’d ask you to please subscribe and even give us a review. Thank you. And for being an active part of our listening community, now, maybe you’re like me, but for the last few weeks, I have been absolutely fascinated watching the process of Elon Musk working to take Twitter, private.
Kelly Barner (01:38):
I don’t need fiction. I don’t need sitcoms. All I need is my daily update on what’s happening with Elon Musk and Twitter. Now, when the news finally broke on April 25th, that the deal was done. Wow. I mean that day, the news was absolutely fascinating and the responses started pouring in from all different sectors, all and perspectives all over the world. Most of those responses were in my opinion, very emotional. They were based on how we are expecting the role of the platform in society to change or who will have access to the platform to change or the type of dialogue, how the content on the platform is moderated we’re business people here. Right? So what I’m really curious about is the business process from this point forward, what about the financing? What about the regulations? What about the votes? This whole big process has no now been set in motion, buying a multi-billion dollar company is not the same thing as buying a Tesla.
Kelly Barner (02:53):
So my mind keeps coming back to this question, what happens now? Now I’m gonna begin with a quick overview of the deals details, because I think it’s important to have sort of the actual fundamental structure of what is being built to take Twitter private in our minds, as we talk about the process going forward. But there’s also an additional note that I think is event. And this is one of those moments where I’m already working on this topic to share with you. And I read another article and I say to myself, ah, that’s connected in this Saturday’s wall street journal. There was an article titled everyone’s a critic and it’s time to read the books written by Alan Porter. The main idea of his article was that we are all being so bombarded with content that we can’t possibly read it all. So instead, what we end up doing is we comment on others, coverage of news stories, or even worse.
Kelly Barner (03:55):
We comment on other people’s comments in response to other people’s news stories. And we never go back to the source material. We’re all guilty of this. How often do you respond to share like comment on a story based on the title, based on the image, I’m a writer, but I’m always honest with people about this. I, I know it’s the pictures people are looking at as they score role and where does that lead us? So here’s a quote from that article that I wanna share with you consider journalism. The norm nowadays is for one reporter to break a story, followed by dozens or hundreds of journalists recycling that content they may add spin of their own, but rarely look into the issue for themselves even when this would require, but a few clicks and a couple of minutes to read a judicial verdict or legislative text, some journalists, scroll Twitter to find the story of the day and rewrite it in their own words and quote.
Kelly Barner (04:59):
So, first of all, we have to observe the irony. We’re here today to talk about Twitter’s role in being the public square or facilitating the common discourse. And Alan Porter is talking about Twitter being the only primary source. Many journalists will bother to consult. I guess that’s why people feel so passionately at this deal, but I heard his challenge in this and after all we do strive to do better than the average here at dial P. So here’s what I did. Obviously I’ve been reading recent news stories. I Googled up specific details, but I also read the eight K the eight K is a securities and exchange commission filing that some people in the news are also referring to as the merger agreement between Elon Musk and Twitter. Just for you. I read the whole thing all 80 pages. Now, first of all, I’m not saying that means you don’t have to read it.
Kelly Barner (06:01):
Primary sources are always better, but at least I’m telling you I’m pulling from a primary source to put together. These thoughts certainly doesn’t make me an expert, but I will say it changed my point of view, going back to the source material rather than just depending on others’ interpretations. The most important thing about it is that if you’ve never read an S E filing, I’m sure this comes as no surprise. It’s absolutely unemotional. Just the facts, little bit of legal leaves, but mostly just the facts. Now that said, let’s cover the basics of this deal. On April 25th, Elon Musk agreed to pay $54 and 20 cents a share for all of the outstanding shares of Twitter. Overall, that deal is worth about $44 billion. So where is the money coming from? It’s coming from two places, not quite an even split, but pretty close 25 and a half billion is coming in debt and margin loan financing.
Kelly Barner (07:10):
So they have Morgan, Stan Stanley, senior funding, and then bank of America and Barclays serving as financial advisors, 13 billion worth of loans have been secured against the value of Twitter, sort of like a home equity loan. Then 12.5 is a margin loan tied to 62 million shares of Tesla stock, which are currently trading at about $870 a piece. So that’s the bank backing that really kind of tipped the scales towards making this possible without this additional funding. There’s no way Elon was going to be able to come up with the capital to take Twitter private on his own, but he does have skin in this game. 21 billion is in equity or a cash contribution from Elon Musk himself. So if you’ve been watching, you know, that last week he sold off some of his Tesla stock about 5% of his holdings, which was worth about eight and a half billion dollars.
Kelly Barner (08:13):
It hasn’t been publicly stated yet where the rest is coming from. But piece of information, just for contact in 2021, inland mosque will pay about 11 billion in taxes. So the scale of the dollars that we’re playing with here are enormous, but relative to his overall worth and access to resources, it’s not out of this world, no space upon intended. So the interesting thing is what the eight K or the merger agreement also outlines about what happens between the signing and the actual closing. So the first word that caught my attention was merger agreement, because I think most of us are thinking of this as an acquisition. Hold that thought for a minute, because we’re gonna come back to that. Now, either party Elon Musk or Twitter can walk away from this whole thing for a billion dollar settlement fee. And if the shareholders fail to approve the sale, which isn’t expect, but you never know Twitter owes Elon a billion dollars for his trouble.
Kelly Barner (09:19):
Now, here are a couple of interesting other little details, especially since we know this is a hostile takeover. This is not something that Twitter’s board or officers were looking for. The eight case spells out that the board and officers will all stay in place until they don’t. So they can quit at any point. Once he’s in position, Elon Musks can fire them. But if nothing happens by default, they all carry over to the new company’s ownership. The existing board is also not allowed to encourage holders to reject the deal. They have to stay out of the vote. They unanimously approved the decision, but now they need to actually stay out of the vote other than authorizing a taking place. Now here’s the other interesting thing. The news is all Elon Musk buys Twitter, but people, individual people don’t buy companies of this scale companies by companies.
Kelly Barner (10:20):
So a week before making and having the official offer accepted Elon Musk created three holding companies that will play different roles in this deal going forward. Musk owns all three of them outright. They are very creatively named ex holdings. One. This is the parent company that will own all the others ex holdings two. This is the organization that will actually merge with Twitter. So I said, we would come back to merger. This isn’t an acquisition. This is Twitter, actually merging with ex holdings two, which will be a holding on subsidiary of ex holdings one. And then finding finally, ex holdings three, which will be used to move around some of the cash and capital associated with funding, the transaction. One little fund fact that may be part of the origin of these ex holdings companies. Elon Musk owns the domain rights to x.com. It was originally owned by PayPal.
Kelly Barner (11:18):
And then at some point along the way, Elon Musk bought it back. So there’s a little bit of speculation happening on the side about what he’s planning to do with x.com. There’s not really anything up on that site right now, but now that he’s naming these three holding companies after it, people are wondering if there’s some bigger plan of foot. Now, the hard part, especially for anybody like me, who’s excited about this deal is that now we’re going into sort of a gray time. Now we have to wait. It’s going to take some time for regulatory reviews and shareholder votes. And Elon Musk now gets an opportunity to look at Twitter’s books. He gets to look at everything beyond what was actually released because they’re a publicly traded company. He may find something in those books that changes his mind about what he wants to do.
Kelly Barner (12:10):
That is his right. We’re expecting a proxy statement within a few weeks. And then after that, all of the shareholder vote materials will be mailed out. Now, in terms of the timeline Twitter’s annual meeting is scheduled for May 25th. That may be too fast. That’s probably not when it’s going to happen, but you can imagine there’s gonna be a lot of attention on Twitter that day. If a majority of the shareholders vote to approve the deal, whenever it takes place, all of them have to sell. So this is a majority takes all kind of vote. Then they move on to the securities and exchange commission approval. Uh, now interestingly Twitter had 5 billion in revenue and 2021 to 0.8 billion of that was in the us 2.2 is abroad. So not only does the S E have to approve any countries where Twitter does business that 2.2 billion that happened abroad.
Kelly Barner (13:05):
They have to approve as well. And of course the federal trade commission and the department of justice have to review, but those are not expected to be a problem because their reviews are largely focused around antitrust concerns and neither Tesla nor SpaceX play in the same area as Twitter. So that’s more of a formal review. It’s not expected to be an issue. The one that people are more concerned about are potential challenges that could come from the S E C. Now Elon Mount has had a somewhat troubled relationship with them in the past, but there have even been a few questions that have been raised specific to this deal. Here are a few things that people are wondering if the S E is going to push back on prior to the official April 25th offer and acceptance, Elon had acquired 9.2% of the company by buying up shares, but there are filings that go with that size of investment.
Kelly Barner (14:04):
And there’s a question of whether some of those filings happened in a timely enough manner by March 11th, before most of us were even watching this story. Elon Musks owned 5% of the company’s stock, but he didn’t file around that until April 4th. So there’s a little bit of a question there. The other filing is that when he did finally fill out his paperwork, he opted to complete the short form, which is intended for passive investors rather than an active, and which is clearly now his intent. There’s a chance that this could delay the approval, but it’s unlikely to actually stop it. And some people are also saying that he may have broken the merger agreement terms, or at the very least the spirit of them, by some of the comments that he’s made that seem to disparage the way the company operates or its leadership. He probably should be staying away from some of that.
Kelly Barner (15:03):
But again, if the shareholders vote to approve, that is unlikely to actually stop the deal from going ahead. So we’re probably going to have to wait about three to six months for this deal to completely close, although it is expected to happen in this calendar year, the current merger agreement says that it should be completed by October 24th, but there’s built the built in provision for a six month extension. Now, we talked earlier about what happens to the board and the company officers, CEO per Agrawal, has committed that he will remain in place until the deal closes. I think everyone’s expectation would be that the day the company officially becomes private. He is going to begin some form of vacation, but he has committed for the sake of his employees and, and investors that he is going to stay in place until it’s finalized. Now, it is possible that there could be a higher bidder during this window of time.
Kelly Barner (16:01):
Although again, buried in the details of the a K they can’t shop themselves around. So they can’t say we really don’t want Elon Musk to come by us. And so we’re gonna go we’re and try to find a new friend. It would have to be spontaneously offered from some other quarter and come with equally competitive terms, as well as financial backing. Now, in terms of the timing, there are a few other interesting details here on April 28th. So just three days after this offer was accepted, we already knew that Twitter was going to report their Q1 earnings. They ended up not holding a call because the acquisition was already underway, or I should correct myself. Merger. Twitter knew they were likely to miss analyst revenue estimates. They ended up reporting 1.2 billion versus the 1.2 analysts were expecting, but they did beat estimates for earnings per share.
Kelly Barner (16:59):
They showed up with 4 cents instead of the 3 cents that were expected. All of those details put into play. There was certainly speculation that Twitter closed the deal with Elon on Monday, because it knew it was going to report disappointing or on Thursday, assuming this deal goes through, what will it mean for the operations of the company? So once they’ve been taken private, there will be fewer regulatory requirements placed on them as a company. And that includes less reporting documentation publicly available. They will no longer be answer to public shareholders, which in some ways also frees up the time required to make decisions. And then finally, they will have more time to focus on growing and altering the business. Instead of worrying about these rather regular earnings, reportings, and analyst review calls. Now I’ll leave. What happens once Elon Musk actually owns Twitter or his ex holdings one, two and three owns Twitter to the pundits, but those of us in business have to be able to follow the business side of this story.
Kelly Barner (18:07):
Even as we may be sort of interested by the drama of the general commentary. This story is an excellent opportunity for all of us to get to understand the merger process better. If possible, by going back to those original documents, they may not be easy to read, but it is well worth our effort, even if it only spares us from the emotion. That’s my point of view, though. Thank you for listening to this audio episode of dial P for procurement, but please don’t just listen, join the conversation and let me know what you think on this topic or others. I can take it. Let’s work together to figure out the best solution until next time. This is Kelly Barner for dial P for procurement on supply chain. Now have a great rest of your day.
Intro/Outro (18:59):
Thank you for joining us for this episode of dial P for procurement and for being an active part of the supply chain. Now community, please check out all of our shows and events@supplychainnow.com. Make sure you follow dial P four procurement on LinkedIn, Twitter, and Facebook to catch all the latest programming details. We’ll see you soon for the next episode of dial P four procurement.
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