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Making Markets EP32: We Musk Talk About Twitter
by Daniel Newman | April 18, 2022

In this episode of Making Markets, host Daniel Newman digs deeper into the evolution of the Twitter and Elon Musk saga. Musk has now put Twitter into an interesting juxtaposition and Twitter’s board decided to enact a poison pill strategy. Let’s explore the pros and cons of the deal, why Twitter’s board should bring the vote to shareholders, and more.

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Transcript:

Daniel Newman: Elon Musk’s bid for Twitter continues to grab headlines as the market wrestles with the idea of a private Twitter and whether or not Musk taking the company private is a good or bad thing for the company. We look at the evolving situation, the responsibility of the board, and the plausible reaction of shareholders. Does Twitter have a plan to provide its shareholders a better long term outcome? All this and more on this week’s Making Markets.

Announcer: This is the Making Markets podcast, brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation, and the companies featured on the show. The Making Markets podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host, principle analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Hey, everybody. Welcome back to another episode of Making Markets. This is the back-to-back episode that’s going to spend a lot of time and energy focusing on Elon Musk, Twitter, and the situation at hand. We are heading into a month plus of tech earnings which are going to be really interesting. Last week’s TSMC results that showed stronger than expected demand for semiconductors gave me a pretty good feeling that we could see better than expected tech results. Although I’ve said for a long time that tech is deflationary, that companies will continue to invest in tech, and despite the fact that we have a less accommodating fed, a slightly more challenging macroeconomic and geopolitical environment, I think the negativity and negative sentiment towards tech is largely overstated. PC is not dead, nor is the mainframe. The Cloud will keep growing and technology and data and AI and all of these things keep going. But that’s for next week. There will be more interviews coming, more CEO conversations and more coverage of this tech earnings wave here on Making Markets.

But I could not help myself on this long holiday weekend, Passover, Easter, and so much more, no matter what it is you’re celebrating, hope you’re enjoying yourself, relaxing with family and tuning in here and enjoying the conversation because that’s really what we’re trying to have here. I guess you could say this is a town square for what’s going on with the deal with Twitter, Elon Musk, the board, the media, the coverage, and the long term prognosis for one of the most iconic, yet underperforming assets in the history of social media.

Quick run back. Just about a week and a half, two weeks ago, it came out that Elon Musk was taking a nearly 10% stake in Twitter. Now, as a little bit of history, Twitter maxed at about $70 a share during what I would say is the most accommodating tech market that I’ve ever seen. That ran up until about November of last year. Didn’t really seem to matter whether your company was a growth company, was a feature that had turned into a company, was a well-performing company. Multiples had expanded all of that liquidity that had been pumped into the market, low interest rates gave a very promising long-term outcome to tech. Now, while I do think it’s been oversold, and I do think that a lot of the negativity, as I mentioned before, is overstated, that was about the best ever.

Now, more realistically at its current trading, Twitter is trading around where it was in 2013, which basically means while the S&P expanded exponentially up and to the right violently over the last decade, Twitter went nowhere. While we do, potentially as users or as news consumers, enjoy Twitter, its real time means of getting information into the market, its access to global issues, events, and being a fire hose, the company’s performed relatively poorly. It’s had numerous different management teams. It’s had its founder, Jack Dorsey, come in and out of the company. He now holds about 2% of the stock. We have a new management team in place right now. We are starting to see features added. Revenue has gone up a little bit. User growth has grown, but stagnant, especially compared to other high growth social media platforms like Snap and TikTok and, of course, anything now under the Meta portfolio, which has also seen some contraction, some challenges in its redirect in its mandate. But all of them performing much better than Twitter has.

Musk came in, bought the shares. The stock shot up almost 30%. Then he was going to join the board. Turns out, after a few days of ongoing and onslaught of tweets, data, fact finding, provocation from Elon Musk, that he opted not to join the board. That’s when the story started to get really interesting. The stock slowed its growth, not knowing what was going to happen next. But then what came after that was pretty cryptic tweets along the lines saying I’ve made an offer. It was an SEC disclosure of a non-binding tender from Elon Musk to buy all of Twitter and take the company private. This drew a ton of headlines and a lot of interest. Now the media is all over this one. We’re all wondering what’s going to happen next.

Musk’s non-binding offer was contingent on financing. It was around $54 a share, which was about an 18% premium from the day that he made the offer. It was about a 40% premium from the initial announcement of his participation as a large shareholder in the company. It’s well over 50% up from the weeks prior to that. Twitter pulled back a lot as growth had as well so that $70 was pretty much halved or a little bit less than halved. Now it’s trading back closer to $50, although it fell a little bit on the news around Musk’s offer and the board’s poison pill. Let’s talk about that.

In his offer, effectively, Musk went hostile saying that if the board does not accept his offer, there will not be any negotiation and that he will likely sell the nine plus percent of the shares that he had bought. Now, at this point, I think the board would be really pleased if that was the outcome. I think they’re prepping themselves for a more hostile, for a fight that could go forward if Musk decides to try to acquire the shares outright and to take a controlling interest in the company. You probably heard that the board got together, trying to figure out what to do with Musk. They instituted a poison pill. This poison pill goes into effect and lasts for a one year period of time if Musk was to acquire more than 15% share at any time in coming weeks, months. It effectively allows the company to issue an unlimited number of new shares and sell to the current or specific shareholders at a discounted price, basically diluting significantly the share and the share count in order to make it more difficult for Musk to acquire a controlling interest in the company.

My gut reaction to that is this insinuates that the company is extraordinarily against Musk getting control of it. They would rather basically dilute the shares, have the stock price tank, than have Musk in control of Twitter, taking the company private. Now, these are the fundamentals, the numbers, and what is likely going to happen if the poison pill is adopted and then put into place. Of course, the reason this is all going on is really a battle less about the economics and more about the future of Twitter, Elon Musk, how he would likely want the company to be run.

Of course, there’s always some insight into how Twitter might be run based upon how Tesla is run. That’s sometimes controversial because Tesla’s known for being a very demanding work environment. Twitter, not so much. Tesla has been growing exponentially and, of course, contributing in a really meaningful way to our agenda for ESG and sustainability, driving the vast majority of all electric vehicles in the marketplace. But Musk is not known for soft tactics, not known for necessarily being the most accommodating in terms of work and open forum for discussions and opinions. He drives profits and bottom lines, which is an interesting conflation because he wants an open town square out of Twitter, but not necessarily is he known for having that be what the workplace at Tesla is like. All this stuff comes together. It’s marked that he’s a free speech absolutist. He believes that Twitter needs to be more open and free. He believes that there’s a lot of problems with the platforms and social algorithms, and he wants to make that more open and transparent.

This goes in a couple of different directions. I think the first direction I want to talk about is what he would do with the company, because I think a lot of people are worried about that. What happens if Musk gets control of the company? Twitter is a very respected, as I mentioned, iconic ecosystem for information, news. The company has largely been a place for people to consume, share. But over the last several years, there’s been a lot of debates that it’s become very polarized in terms of left and right issues, free speech versus censorship, what should be shared, what shouldn’t be shared.

It’s also an environment that’s really lacked growth. It lacks a lot of real engagement. It’s got huge problems with spam and bots that haven’t been solved by engineers. It’s somewhat desolate at times, and a lot of the activity and the interactions that go on, especially around tough, controversial issues, which is, I believe, what Musk is interested in seeing having a better open forum, lead to a lot of abuse, a lot of criticism.

Of course, there’s that whole thing about a demarcation between what is an abusive response and what is a challenging response, because there are certain people out there that want to be able to say anything they want and they don’t want to be challenged. Then there are other people that want to challenge everything. Then there are people that just want to abuse those that have differing opinions than them.

Musk, I believe, has a philosophical approach that he wants to use to change this. Of course, this is where a lot of the contesting of his taking ownership of the company comes in, is would he do this and how open would he be? He’s saying that he wants to open up the API. He wants to make it more transparent. That should be the real debate when it comes to Musk owning and taking the company private. I fundamentally believe the only way you end up with social media being fully transparent and being an open free speech environment requires complete transparency of the AI, of the algorithms, of the models that are used to determine who sees what, what gets shared, how it gets amplified. The commitment to open that up should be interesting to people.

However, for some reason it’s not. I’m not sure if that’s because they don’t trust that he would actually do that or they don’t want him to. That’s another big question right now because social media right now tends to inflame people. Think about the social dilemma. Right? How did we end up with this massive gulf between political left and the political right? It mostly comes down to what we are exposed to when we are spending our time searching. In order to drive engagement, you want people to see things that are going to either match their world views, to drive positive and ongoing engagement, or it tends to show things that are going to inflame, which also drives engagement and often at a higher rate than even the positive and supportive content that matches your world beliefs. But the negative stuff tends to inflame, create higher levels of engagement, sharing, discourse. That of course drives revenue. It drives eyeballs, it drives users.

These issues are all in contrast to one another if the goal, in the end, is to have an environment that is free speech, that of course appropriately is moderated for abuse and spam, but doesn’t censor ideas that aren’t matching what the popular consensus is among a party left or right. Again, it can be either way. If you’re truly going for an open forum or for absolute free speech, it can’t be about partisan in either direction which, again, I think scares people on both sides. That’s another area that needs to be explored. But don’t think Musk who, primarily, he’s a provocateur, he’s a thinker, he definitely likes to bring controversial issues to bear.

You can see certain capitalistic, certain conservative values in his approach. You can also see he really cares about things like climate change with what he’s built with Tesla, things he’s building with solar, problems he’s solved in terms of moving satellites in Ukraine, or helping to move the satellites in Ukraine or to invest in space exploration, which again is controversial, but is something that private enterprise needs to support as we’ve seen investment in this by government slow. Of course the government is already at the end of its means until it figures out either a better revenue driving strategy or balanced budget. But that’s another story for another day. That’s what’s going on on the technical standpoint. He wants to add transparency, make it visible. If that’s true, it’s hard to not support that. But, of course, like I said, there are as many questions as answers. In a private enterprise, what he would have to disclose would be less significant than what, as a public company, has to be disclosed.

Now, the other side of this is the board and the whole approach of the poison pill. This is really interesting. Having talked to The Wall Street Journal a few times about this, I did a little bit of research on the poison pill and what it means. I feel like, first of all, the poison pill and the decision to adopt it was a clear marker that the board takes this offer very seriously. Not only do they take it very seriously, but they take that he may go hostile or he may start trying to accumulate shares in order to buy the company if the board doesn’t approve the offer that he’s made. The board knows the best approach could be the best thing for the company long term.

Of course, this is a board that is made up of highly capable, hopefully very ethical people who are acting in the best interest of their employees and of their shareholders. But it’s complicated so this is probably going to become a longer battle. Because the board made this decision unilaterally, I think a lot of people saw Musk tweeted, does the board have a responsibility to bring this offer in front of its shareholders? 83% of a huge number of respondents said the board should bring it to shareholders. Right now, the board at least has not indicated that plan at this point which, as far as I see it, that means you’re are going to see a number of shareholder lawsuits because, if the stock goes down significantly as a byproduct of these poison pills, you can be sure that shareholders that would’ve wanted that deal are going to be angry about it. Therefore, that could also be the start of a proxy battle, which could be used to out certain directors and bring in new directors that are going to be more supportive of this.

This brings me back to a few years ago. Some of you may remember there was a deal that got put on the table from Avago or Broadcom was trying to take over Qualcomm. This is one of those where an offer was made, Qualcomm stock had been long repressed, the company was in the middle of a number of lawsuits, dealing with the FTC, potentially lost Apple or was going to go to a long trial with Apple intellectual property case. There was even issues related to national security because Avago was domiciled here but a company based in Asia. The speak that came out of Qualcomm was largely that this was a bad deal. It could be terrible for the future of innovation. I stood by that. I truly did believe the companies did not have the right fit. It probably would’ve been bad given Qualcomm’s contributions to intellectual property, to standards, 3g, 4g, 5g, et cetera.

However, the board saying this was not necessarily the sentiment match of shareholders. Shareholders seemed to like the deal. The stock hadn’t moved in the right direction for a long time. Basically the only reason that deal didn’t happen was there was a presidential veto when Trump came in and killed the deal based on national security interests for communications. Now will antitrust and regulators, Lina Khan, get involved in a deal like this if it goes through? The bottom line is it’s possible. But when you look at what’s been offered here, it’s a significant premium over the April 1st share price. The market is challenging. We have a low beta environment where growth stocks are probably going to be stuck moving sideways for a long period of time. With Musk potentially exiting, the stock could see it fall 20%, 30%, 50% in the wake of him deciding to pull out.

If he goes for it, they’re going to dilute. That’ll bring the price down. I don’t see a way to keep your shareholder happy here. I feel like Musk has them in a strangle and this poison pill plan is putting all these directors at a lot of risk, putting the company at risk. It’s hard to say that this 20% premium over its current trade is not an offer that, at the very least, needs to be brought in front of shareholders and needs to be considered. This is going to be a really interesting situation to watch play out.

The court of public opinion will, of course, swing wildly depending on where people stand on Musk, on his contributions, on his personal beliefs, on his provocative and sometimes risky social, and the ways he communicates and shares and what he tweets. Having said that, he’s got a great track record. If you look at the PE ratio of Tesla versus the PE ratio of Twitter, if you look at the growth of Tesla, you look at the growth of other companies and investments, you look at the competency of his leaders that are running his businesses, there’s a lot to would be said that Musk could potentially take this company to new heights, could make Twitter a better environment. It could be a better social media platform for getting accurate, open communication without bias. Again, that comes down to how he handles the algorithm and, of course, how he handles transparency. All that would need to be, of course, somehow audited. That’s one of the problems with it not being in the public market. There’s a lot here.

But in the end, what do I believe? I believe that Twitter has a fiduciary responsibility to bring the deal in front of its shareholders. I think that not bringing it to shareholders is providing a pretty significant amount of risk, especially for a company that can’t really deliver a clear plan of how they’re going to bring growth revenue, user growth, to an extent where the stock is going to be insured over the next few years to be significantly priced above Musk’s offer. I also think the company could alternatively shop for potential other suitors. There are going to be a number of companies, due to a stricter antitrust environment, that would probably not be likely to be able to get it through regulatory approval. Companies like Google, Amazon probably would never be able to get the deal done.

Of course, we know Meta would not. Any major social, of course, any sort of global acquisition like out of China would never happen either. This thing is definitely a national institution. It’s one of the most well known social platforms on the planet and so it needs to be taken care of. Regulators will need to have eyes on it. Could a Disney come in? Disney’s a possibility, been looking in the space. Could it go private? Could some of these PE firms take it private? But I guess the point is it could be an opportunity to shop, to say, “Hey. Is there anyone out there willing to make a better deal,” because I think, again, that shows that the board has done its diligence, has been prudent in trying to discover what the intrinsic value that the market might be willing to pay right now for the company in a deal like this, especially if they don’t want the Musk deal. But I think the board needs to do something other than just a poison pill and holding static, because it’s hard to not see the stock falling dramatically.

But this saga is going to be fascinating. It’s going to be an ongoing discussion, I believe, for at least the next several weeks. If it ends quickly with Musk, I see the shareholder lawsuits coming in fast and furious. If the Musk thing goes on, I think it could become a very interesting topic that will continue over the next weeks and months until a deal is either reached or it’s not. In the end, I just don’t think it’ll happen, but probably not for the reasons it shouldn’t. But I guess we’ll see. It’s a fascinating time and a fascinating market. I love to see good, controversial debates in the market.

I think that Twitter has been largely failure in terms of its growth and revenue. Of course, 10 years of static stock price. Can Musk fix that? Well, at the very least, he could give shareholders an immediate exit at a premium. Can the new leadership team do better? How long will that take? That’s a question mark right now given the high raising interest rates, high inflation, and an anti-growth sentiment. But that’ll turn, too. When it does, growth will have another day. The question is, will Twitter be able to ride that wave up or will it even be a public company? I don’t know. For now, that’s it. See you all later.

Announcer: Thank you for tuning in to Making Markets. Enjoy what you heard? Please subscribe to get every episode on your favorite podcast platform. You can also watch us on the web at futurumresearch.com/makingmarkets. Until next time, this is Making Markets, your essential show for market news, analysis, and commentary on today’s most innovative tech companies.

About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio