On April 14, 2022, entrepreneur Elon Musk signified his interest to buy Twitter Inc. at a price of US$54.20 per share, amounting to a total transaction value of US$44 billion. Musk's strategic intent was to grow the company into a platform for free speech and expedite its cash flow-positive to make the company profitable. The financing structure for this leveraged buyout primarily relied on a margin loan collateralized by Musk's holdings in Tesla Inc. However, on July 8, 2022, Musk publicly announced his decision to withdraw from the proposed merger. Legal proceedings were pursued against Musk, seeking enforcement of the merger agreement and compelling Musk to fulfill the transaction. With the lawsuit, Musk must decide if his bid is a fair valuation and, ultimately, whether to proceed with or abandon the acquisition of Twitter Inc., carefully weighing possible losses based on the results of the ongoing litigation in the Delaware Court of Chancery.
Cooper Acosta, Atif Ikram, Zhichuan Frank Li
Harvard Business Review (W30166-PDF-ENG)
November 06, 2022
Case questions answered:
Case study questions answered in the first solution:
- How is Twitter’s current and future business performance taking into account the company’s own factors and external factors? What is your relative comparative advantage over your competitors at the time of acquisition?
- What is it and what is the importance of performing ‘due diligence’ in a company acquisition process?
- What are the benefits and drawbacks of performing a relative valuation using comparable Twitter multiples? Explain how multiples should be used (EBITDA, EBIT, PE, EV/MAUs multiple) and present an example with the values of a company presented in Exhibit 5 and the figures of Twitter Inc. (select only one company for the example).
- According to your analysis, what is the relative value of Twitter stock? Clearly mention which companies you chose as comparable. Likewise, indicate which multiple(s) you chose to carry out the valuation. Present strong arguments to justify your answers. (The price does not have to be the same as the agreed one, it all depends on which companies they chose and the purification of the basket, if it is different, explain the reason for this difference).
- At what price would you recommend Twitter offer its shares? If an investor is considering buying Twitter shares, what is your recommendation?
Case study questions answered in the second solution:
- Describe the background of the Elon Musk deal with Twitter.
- Explain the deal terms.
- Does the merger benefit both parties?
- Discuss whether Musk’s bid offers fair value for Twitter’s stock.
- What are the implications of the deal?
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Elon Musk's Twitter Deal: Valuation and Financing of the Leveraged Buyout Case Answers
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1.) How is Twitter’s current and future business performance taking into account the company’s own factors and external factors? What is your relative comparative advantage over your competitors at the time of acquisition?
Twitter is a consolidated company in 2006 and with the social network called Twitter. If you analyze the current performance of the company, conclusions can be drawn that may be worrying.
When Elon Musk did his analysis to buy Twitter, he realized that there were certain factors internal to the company that were not favorable. Starting with the fact that 20% of the accounts on the platform were fake; when the expectation was that only 5% were false.
This has a huge impact on the credibility of the platform and the value of the platform as a marketing medium. In addition, Twitter had lower performance than other platforms that are considered the competition. An indicator of this is that half is generated per daily active user compared to what the leading companies in the sector generate.
Finally, Twitter was unable to convert user database data into targeted ads. This being the main revenue activity had consequences such as operating margins trending downward, the value of the company went from $60 billion to $36 billion and they had a negative P/.
Certain factors external to the company also have an effect on the current status of the company. During the 2020 pandemic, there was an increase in the use of social networks due to confinement. Regarding the expected future performance, it can be said that Musk’s arrival appears to be an improvement for the platform. Elon Musk is expected to reduce inefficient expenses in the research area and improve the EBITDA margin between 6% and 7%.
Likewise, it is expected to achieve a significant reduction in CapEx accompanied by an increase in cash flows. Regarding the external factors that may affect it company, it is concluded that after the pandemic, high inflation was expected and interest rates would increase. Given this increase, there is greater debt service and a reduction in shareholder cash flows.
2.) What is it and what is the importance of performing ‘due diligence’ in a company acquisition process?
Due diligence is a process of verifying…
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