- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
Hostile Takeovers – Twitter and Musk Saga
๐๐จ๐ฌ๐ญ๐ข๐ฅ๐ ๐ญ๐๐ค๐๐จ๐ฏ๐๐ซ๐ฌ are rare, but the recent ๐๐ฎ๐ฌ๐ค-๐๐ฐ๐ข๐ญ๐ญ๐๐ซ ๐ฌ๐๐ ๐ raises a few questions from my end. In my experience, there are two motivations behind this deal.
1)๐๐ฑ ๐ฉ๐จ๐ฌ๐ญ ๐ซ๐๐ญ๐ข๐จ๐ง๐๐ฅ๐:ย With its new management, Musk infuses fresh ideas and superior efficiencies and rectifies the past mistakes of Twitter.
2)๐๐ฑ-๐๐ง๐ญ๐ ๐ซ๐๐ญ๐ข๐จ๐ง๐๐ฅ๐:ย Despite the failed bid, this action may induce a disciplining effect on Twitter of the hovering threat of a takeover in the case of continuing poor performance.
However, another component of takeovers has nothing to do with the above two rationales.
3)#elonmuskย intends to build an empire and is willing to acquire the target to enjoy control benefits, though this corporate action reduces shareholder value.
๐๐ ๐ ๐๐ฆ ๐๐๐ฏ๐ข๐ฌ๐ข๐ง๐ ๐๐ฐ๐ข๐ญ๐ญ๐๐ซ ๐จ๐ซ ๐๐ฎ๐ฌ๐ค (๐๐ฌ๐ฌ๐ฎ๐ฆ๐ ๐ข๐ญ ๐๐ฌ ๐ก๐ฒ๐ฉ๐จ๐ญ๐ก๐๐ญ๐ข๐๐๐ฅ), ๐ฆ๐ฒ ๐๐ซ๐๐ฆ๐๐ฐ๐จ๐ซ๐ค ๐๐จ๐ซ ๐ญ๐ก๐ข๐ฌ ๐๐๐๐ฅ ๐ข๐ฌ ๐๐ฌ ๐๐จ๐ฅ๐ฅ๐จ๐ฐ๐ฌ:
V= Current value to Twitter shareholders
W= Returns for Twitter’s current majority shareholder
P= Probability Twitter will earn excess returns (roe>ke)
R= Excess returns/EVA (roe-ke)
Rb= Current stake of the majority shareholder
๐๐ญ ๐ฌ๐ญ๐๐ญ๐ฎ๐ฌ ๐ช๐ฎ๐จ,
V= P(R-Rb)
W= PRb
๐ ๐จ๐ซ ๐๐ฎ๐ฌ๐ค, ๐๐๐ญ๐๐ซ ๐ญ๐ก๐ข๐ฌ ๐๐๐๐ฅ,
V”= Expected value to Twitter investors after Musk takes over
W”= Musk’s excess returns after the takeover
Ifย Twitter‘s corporate charter makes this transfer of control for Musk difficult with the Poison pill/shareholder rights plan, then Musk needs to derive for what value of V” and W” should this transfer of control occur.
Besides the transaction price, Musk needs to set aside a sunk cost to define a corporate strategy for Twitter and ascertain the impact of committing such resources.
If Musk does ๐ง๐จ๐ญ ๐ก๐๐ฏ๐ ๐๐ง๐ฒ ๐๐ซ๐๐๐ข๐ญ ๐๐จ๐ง๐ฌ๐ญ๐ซ๐๐ข๐ง๐ญ๐ฌ on raising funds for this acquisition (he can pay 100% (V”+W”)) and seeks to maximise his NPV from this deal,
๐๐๐ > ๐”-๐”-๐๐ฎ๐ง๐ค ๐๐จ๐ฌ๐ญ๐ฌ-๐๐ฉ๐ฉ๐จ๐ซ๐ญ๐ฎ๐ง๐ข๐ญ๐ฒ ๐๐จ๐ฌ๐ญ๐ฌ ๐จ๐ ๐๐จ๐ซ๐๐ ๐จ๐ง๐ ๐ฌ๐ฎ๐ซ๐ฉ๐ฅ๐ฎ๐ฌ
In the case of Twitter, i am still unclear whether the rationale behind this hostile takeover is point 1 or point 3.
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