In 1879, Jay Gould — the most ruthless robber baron of the last Gilded Age — bought the New York World.
Mainstream press coverage of his unscrupulous behavior offended his massive ego. His equally gargantuan fortune allowed him to buy anything he wanted. So, he bought a newspaper and proceeded to turn it into his personal propaganda platform.
Once again, the world’s richest man will soon own the world’s most influential social media platform.
As Bloomberg’s incomparable Matt Levine points out, one thing guaranteed to happen is that an army of lawyers and bankers will get no sleep between 4:01 p.m. on Friday and 9:29 a.m. next Monday.
During those 65 weekend hours, Elon Musk’s people and Twitter’s people will have “material conversations” about the former’s deal to buy the company. (During market hours they’d have to share everything publicly, given their potential impact on the company’s share price.)
But we’re interested in the bigger picture. The longer term. The endgame.
On the stock price front, the impact on Twitter (NYSE: TWTR)’s share price is already baked in. Unless something derails the deal … entirely possible, as you’ll see … TWTR will cease to trade at $54.20 a share, about 4% upside from Monday’s closing price.
But as Jay Gould discovered, the path to media’s commanding heights is never smooth.
The Price of “Free Speech”
Musk is buying Twitter via a leveraged buyout (LBO).
This involves raising debt to buy a company, transferring that debt to its books, improving its performance and using the enhanced cash flow to pay off the loans.
Adding so much new debt reduces a company’s margin of error. That’s especially true of Twitter, which has only turned a profit in two out of the last ten years.
But in Twitter’s case, some analysts are asking whether Musk’s bankers are smoking the same herb he favors.
Out of a purchase price of $44 billion, $25.5 billion is debt. Banks are lending Musk $12.5 billion secured by his Tesla stock. They’ve also packaged loans worth $13 billion.
This new debt will puff up Twitter’s leverage to a massive 8.6 times EBITDA. The interest on that debt alone will swallow up two-thirds of Twitter’s EBITDA.
In other words, Twitter will soon become a financial land mine. Everything needs to go perfectly … and then some.
I doubt Musk has thought much about that. Nothing he’s said suggests he’s interested in making Twitter consistently profitable.
Instead, his motivation is ideological. He says he’s a “free-speech absolutist.” He promises to undo the platform’s content moderation policies. Presumably, that means an end to censorship and restoring people who’ve been banned, such as Donald Trump.
But there are reasons to think that’s incompatible with the huge financial leverage of his LBO.
5 Reasons TWTR Shareholders Should Pay Close Attention to Musk’s LBO
First, Twitter adopted content moderation due to financial — not ideological — concerns. Most advertisers didn’t want their wares to appear next to controversial tweets.
Returning to “free speech” that includes unverified claims, outright lies, bigotry and incitement to sociopolitical disorder would drive many of those advertisers away for good. To make matters worse, last week the European Union agreed to a Digital Services Act that will penalize or ban social media platforms that fail to moderate content.
Second, Musk says he will make Twitter profitable by cutting ads and adopting a subscription model. But that’s highly unlikely to work.
Despite its pretensions as “the internet’s town square,” most people use Twitter for entertainment, political/emotional stimulation and egotism. Only a small elite take seriously the discourse that’s possible in 280 characters or less. Everyone else is there for the fireworks. Charging for that will send them elsewhere. A paywall may work for The New York Times, but not for crowdsourced outrage.
Third, Musk’s tears for “free speech” are of the crocodile variety.
He’s well known for attacking and blocking Twitter users who question or disagree with him (much like his close friend, so-called libertarian Peter Thiel). Earlier this year, for example, he tried to get a teenager who’d developed a bot that tracked the movements of his private jet kicked off the platform.
Given his demonstrated ego, Musk would only be hands-off towards content that didn’t upset him. There are already concerns that he may intervene in favor of countries where he has business interests, like China. Manipulating Twitter in his favor would be hugely damaging to the platform.
Fourth, there’s the company’s intellectual and social capital.
There are rumors of mass resignations. Concern over the direction of the platform employees helped build is one thing. More importantly, tech workers have seen an upsurge in “class consciousness.” But Musk is notoriously dismissive of worker rights. One Tesla employee, mercilessly harassed by Musk’s private investigators, fled the country.
Finally, there’s Musk’s own history on Twitter.
He’s one of its most active users. He has 83 million followers. He tweets constantly. His style ranges from playful to aggressive to borderline illegal.
His tweets move markets. His flirtations with trashcoins like Dogecoin and Shiba Inu pumped their values as his legions of fans took his endorsements as gospel. They promptly collapsed. Tesla’s short-lived acceptance of bitcoin had a similar impact.
More consequential is his blatant tweet-based manipulation of Tesla’s stock price. He paid a huge fine to the Securities and Exchange Commission for lying about taking Tesla private in 2018. But that didn’t stop him. On more than one occasion his tweets have pumped Tesla’s stock price — after which the company issued more shares to take advantage before the hype faded.
Twitter: 3 Possible Outcomes
With this in mind, here are three potential outcomes, in increasing order of likelihood:
- Given its shaky financial underpinnings, Musk’s LBO lenders insist on covenants that restrict his freedom to change the platform. He walks away from the deal.
- Musk fails to make his alternative free speech/subscription business model work, eventually loses interest and sells the company. (If you think the great entrepreneur never fails to deliver, research the Tesla Cybertruck and Tesla Semi).
- A Musk-owned Twitter goes from one crisis to another. The platform itself becomes the story. Eventually, the toxicity surrounding the social media network becomes too much and another company acquires it, or it shuts down.
Jay Gould’s ownership of the New York World lasted a short four years. After having run the paper into the ground, he eventually sold it to new owners who turned it into a latter-day National Enquirer.
Can Musk do better? I have my doubts.