- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
Hostile Takeovers – Twitter and Musk Saga
𝐇𝐨𝐬𝐭𝐢𝐥𝐞 𝐭𝐚𝐤𝐞𝐨𝐯𝐞𝐫𝐬 are rare, but the recent 𝐌𝐮𝐬𝐤-𝐓𝐰𝐢𝐭𝐭𝐞𝐫 𝐬𝐚𝐠𝐚 raises a few questions from my end. In my experience, there are two motivations behind this deal.
1)𝐄𝐱 𝐩𝐨𝐬𝐭 𝐫𝐚𝐭𝐢𝐨𝐧𝐚𝐥𝐞: With its new management, Musk infuses fresh ideas and superior efficiencies and rectifies the past mistakes of Twitter.
2)𝐄𝐱-𝐚𝐧𝐭𝐞 𝐫𝐚𝐭𝐢𝐨𝐧𝐚𝐥𝐞: 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)#elonmusk intends to build an empire and is willing to acquire the target to enjoy control benefits, though this corporate action reduces shareholder value.
𝐈𝐟 𝐈 𝐚𝐦 𝐚𝐝𝐯𝐢𝐬𝐢𝐧𝐠 𝐓𝐰𝐢𝐭𝐭𝐞𝐫 𝐨𝐫 𝐌𝐮𝐬𝐤 (𝐚𝐬𝐬𝐮𝐦𝐞 𝐢𝐭 𝐚𝐬 𝐡𝐲𝐩𝐨𝐭𝐡𝐞𝐭𝐢𝐜𝐚𝐥), 𝐦𝐲 𝐟𝐫𝐚𝐦𝐞𝐰𝐨𝐫𝐤 𝐟𝐨𝐫 𝐭𝐡𝐢𝐬 𝐝𝐞𝐚𝐥 𝐢𝐬 𝐚𝐬 𝐟𝐨𝐥𝐥𝐨𝐰𝐬:
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
𝐀𝐭 𝐬𝐭𝐚𝐭𝐮𝐬 𝐪𝐮𝐨,
𝐅𝐨𝐫 𝐌𝐮𝐬𝐤, 𝐚𝐟𝐭𝐞𝐫 𝐭𝐡𝐢𝐬 𝐝𝐞𝐚𝐥,
V”= Expected value to Twitter investors after Musk takes over
W”= Musk’s excess returns after the takeover
If 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 𝐧𝐨𝐭 𝐡𝐚𝐯𝐞 𝐚𝐧𝐲 𝐜𝐫𝐞𝐝𝐢𝐭 𝐜𝐨𝐧𝐬𝐭𝐫𝐚𝐢𝐧𝐭𝐬 on raising funds for this acquisition (he can pay 100% (V”+W”)) and seeks to maximise his NPV from this deal,
𝐍𝐏𝐕 > 𝐖”-𝐕”-𝐒𝐮𝐧𝐤 𝐜𝐨𝐬𝐭𝐬-𝐎𝐩𝐩𝐨𝐫𝐭𝐮𝐧𝐢𝐭𝐲 𝐂𝐨𝐬𝐭𝐬 𝐨𝐟 𝐟𝐨𝐫𝐞𝐠𝐨𝐧𝐞 𝐬𝐮𝐫𝐩𝐥𝐮𝐬
In the case of Twitter, i am still unclear whether the rationale behind this hostile takeover is point 1 or point 3.
[…] Elon musk’s deal with Twitter is finally over, and no other 𝐝𝐞𝐚𝐥 𝐡𝐚𝐬 𝐠𝐚𝐫𝐧𝐞𝐫𝐞𝐝 𝐬𝐮𝐜𝐡 𝐡𝐞𝐚𝐯𝐲 𝐚𝐭𝐭𝐞𝐧𝐭𝐢𝐨𝐧 𝐠𝐥𝐨𝐛𝐚𝐥𝐥𝐲 as this deal. I have written a few posts on this deal, providing insights on Twitter valuation and how it could impact Twitter and Tesla post this transaction. 𝐇𝐢𝐬𝐭𝐨𝐫𝐲 𝐰𝐢𝐥𝐥 𝐭𝐞𝐥𝐥 𝐮𝐬 𝐢𝐟 𝐭𝐡𝐢𝐬 𝐦𝐨𝐯𝐞 𝐡𝐞𝐥𝐩𝐬 𝐓𝐰𝐢𝐭𝐭𝐞𝐫 𝐨𝐫 𝐟𝐮𝐫𝐭𝐡𝐞𝐫 𝐩𝐮𝐬𝐡𝐞𝐬 𝐢𝐭 𝐭𝐨 𝐭𝐡𝐞 𝐝𝐨𝐥𝐝𝐫𝐮𝐦𝐬. […]