Elon Musk has warned that Twitter’s board of directors will face ‘titanic’ legal liability if they go against the interests of shareholders in rejecting his $43 billion hostile takeover.
Twitter’s board met for several hours on Thursday afternoon to discuss Musk’s offer, and are reportedly considering several options to block the bid. A formal response is could take several days.
Responding to reports that the board is mulling a ‘poison pill’ plan that would prevent him from increasing his stake in Twitter, Musk tweeted: ‘If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty.’
‘The liability they would thereby assume would be titanic in scale,’ he added, apparently referring to potential shareholder lawsuits.
Twitter CEO Parag Agrawal, who also holds a board seat, insisted that the company was not being ‘held hostage’ by Musk as he sought to reassure panicked employees at an all-hands meeting on Thursday.
Elon Musk has warned that Twitter’s board of directors will face ‘titanic’ legal liability if they go against the interests of shareholders in rejecting his $43 billion hostile takeover
Saudi prince claims to be major Twitter shareholder, but his true stake is unclear
On Thursday, Saudi Prince Alwaleed bin Talal tweeted that he ‘rejected’ Musk’s bid and claimed to be one of Twitter’s ‘largest’ shareholders.
Bin Talal attached a screenshot of a 2015 announcement that his investment firm owned 5.2 percent of Twitter.
But in 2016, bin Talal cut his stake below 5 percent, and has not had to report any further trades.
It means that the Saudi’s true Twitter stake is unclear — while it is certainly less than 5 percent, it could be as low as zero.
Board members of a public company are bound to act in the best financial interests of their shareholders — however, that does not mean that Twitter’s board must accept Musk’s deal.
While it would be a clear breach of fiduciary duty to reject one buyout offer and accept a lower bid, Twitter’s board could likely find legal cover to reject Musk’s offer by saying they feel it undervalues the company.
That is just the argument that one purported shareholder, Saudi Prince Alwaleed bin Talal made on Thursday, drawing a sharp reply from Musk, who questioned Saudi Arabia’s ‘views on journalistic freedom of speech.’
It’s unclear just what stake bin Talal has in Twitter, if any, but regulatory filings show that it is something less than 5 percent.
If they reject Musk’s bid, Twitter’s board could also say that they aren’t confident he will be able to secure financing for the deal — meaning that questions over where the cash will come from could be central in the coming days.
Although Musk is the richest man in the world, with a $273.6 billion fortune according to a Forbes tally, most of his wealth is tied up in Tesla and SpaceX stock, and it’s unclear just how much cash he has.
Musk has not said where he would get the cash for the deal, and his regulatory filing vaguely specifies that the buyout offer is subject to ‘completion of anticipated financing’.
At a conference on Thursday, Musk claimed he had ‘sufficient assets’ to purchase Twitter out of his own pocket, but also suggested the deal might fall through.
‘I do think this will be somewhat painful and I’m not sure that I will actually be able to acquire it,’ he said.
Twitter CEO Parag Agrawal, who also holds a board seat, insisted that the company was not being ‘held hostage’ by Musk as he sought to reassure panicked employees
Dan Ives, an analyst at Wedbush Securities, estimates that Musk will need to line up some $15 billion to $20 billion in additional financing.
Musk does own about 17 percent of Tesla, a company valued at $17 trillion, and could raise cash by either selling shares or using the stock as collateral for loans.
However, Musk has said previously that he wants to avoid reducing his stake in Tesla if at all possible.
Though he sold off huge blocks of Tesla shares last year, it was to pay taxes, and he actually ended up with a slightly bigger stake in the company, due to the vesting of options.
Musk would have to sell about 43 million shares of Tesla to finance the Twitter deal, which would likely tank Tesla’s share price, and would reduce his Tesla stake to about 13 percent.
Another option would be to use Tesla shares as collateral for loans. However, Tesla limits executives to using no more than 25 percent of their company stock as collateral for loans, and Musk has already pledged a portion of his shares for other loans, filings show.
Traditional debt financing would be another possible option for Musk. In this route, a bank would provide a loan for the purchase and the debt would be added to Twitter’s balance sheet, and paid off with the company’s cash flow.
However, Musk revealed in a filing that Morgan Stanley is his ‘financial advisor’ on the deal, and the investment bank is not known for pulling together the large-scale debt financing that the Twitter deal would require.
On Thursday, Tesla’s stock fell 3.7 percent amid fears Musk would sell off shares to buy Twitter
Twitter’s share price remains below Musk’s offer level of $54.20, suggesting that the market is uncertain whether his bid will be accepted by the board
Morgan Stanley could team up with other big banks better known for such deals, but Musk has already burned some bridges in that arena.
JPMorgan Chase, for example, is currently involved in suits and countersuits with Tesla over Musk’s tweets and disputed bond contracts.
Yet another option for Musk would be to team up with a private equity firm.
That is the path he considered in 2018, when he famously tweeted that he had ‘funding secured’ to take Tesla private at $420 per share.
In that case he consulted with Silver Lake, a technology-focused private equity firm led by Egon Durban — who as chance would have it now sits on Twitter’s board.
Durban joined Twitter’s board in 2020 as part of a deal the company struck with another activist investor, Elliot Management, which wanted to shake up the company’s management.
But any chance of Durban joining forces with Musk to finance the takeover would seem precluded by the deal he struck to gain a board seat, which limits Silver Lake from acquiring more than 5 percent of the company.
As for other private equity firms, its seems unlikely that they would consider Twitter an attractive target.
Private equity firms typically target companies that throw off lots of cash, using cash flow and cost-cutting to pay off debts incurred to buy the firm.
Twitter, however, had negative cash flow of $370 million last year, and does not seem like a candidate to turn cash-flow positive in the near term.
Musk appeared at the TED2022 Conference on Thursday, saying that he is pursuing a hostile takeover of Twitter not for financial gain, but for the ‘future of civilization’
Taken together, all of the caveats mean that Twitter’s board could well use concerns about financing as a reason to reject Musk’s proposal.
Nevertheless, Musk claimed on Thursday that he had a ‘Plan B’ in place if Twitter’s board votes against his deal.
The board on Thursday was reportedly considering seeking a ‘white knight’ to make a competing offer, as well as a ‘poison pill’ to prevent Musk from increasing his stake.
Also known as shareholder rights plans, poison pills typically trigger an automatic stock dilution through a flood of new shares if a corporate raider’s ownership stake grows too large.
In Twitter’s case, the idea would be to prevent Musk from increasing his 9.2 percent stake in order to pressure the board to accept his deal.
If the board did enact a poison pill, Musk might still be able to pursue a takeover through what is known as a tender offer.
A tender offer involves a direct appeal to shareholders to purchase their stock at a prescribed price, typically above current market value, at a specific time.
Typically the offer is only triggered if a certain percentage of shareholders accept the tender.
If Musk gained more than 50 percent of Twitter’s voting shares through such a tender offer, he would effectively control the company.
In separate tweets on Thursday, Musk argued that it ‘would be utterly indefensible’ not to allow shareholders to vote directly on his plan. ‘They own the company, not the board of directors,’ he wrote.
Musk’s bid to buy Twitter raises as many questions as it does answers
Why is Musk interested in Twitter?
Musk, speaking at the TED2022 Conference in Vancouver on Thursday afternoon, defended his takeover bid, saying he was motivated to transform Twitter into a bastion of free speech.
‘This is not about the economics,’ Musk said. ‘My strong intuitive sense is having a public platform that is maximally trusted and broadly inclusive is important to the future of civilization.’
How will Musk fund the bid?
The world’s richest man is trying to buy all of Twitter, but has not disclosed financing details in his purchase proposal.
Elon Musk, whose net worth is approximately $270billion, has offered to purchase the social media platform in a generous all-cash deal of $41.39billion.
However, the entrepreneur’s wealth is mostly held in Tesla shares, a company that limits how much Musk can borrow against its stock.
Musk sold more than $15billion worth of his Tesla shares, about 10 percent of his stake in the electric vehicle maker, late last year to settle a tax obligation.
The billionaire has also burned bridges with several major lenders, such as JPMorgan Chase, which is why analysts allege his choice to have investment bank Morgan Stanley act as the financial adviser for his offer is notable.
What happens now?
SpaceX boss Elon Musk has launched his bid to take over Twitter, however the company’s Board of Directors still has the right to reject his offer.
The billionaire entrepreneur issued a tender offer Thursday morning to buy all of Twitter’s stock at $54.20 per share, 18.2 percent above the current market price of $45.85 per share.
If the board were to reject Musk’s tender offer, he could then approach the shareholders, who may accept the offer.
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