On Monday, 25 April, Elon Musk, founder of Tesla and the world’s richest man, made a deal with Twitter to buy the company for $44 billion.
The deal will close within the next 3-6 months. If the deal does not go according to plan, either Twitter or Musk may be required to pay the other $1 billion. Additionally, if it does not close by 24 October, both parties will be allowed to walk away.
Along with paying $21 billion in cash, Musk will use $12.5 billion in loans against his Tesla stock and $13 billion in bank loans to fund this monumental purchase.
What are Musk’s motivations?
Musk’s motive behind the historic purchase is purportedly to promote free speech by privatising Twitter.
While Twitter is wildly popular, the unpredictability of its cash flow makes the company only sporadically profitable. However, it is incredibly influential and has a large impact on businesses, politics, and society at large. This seems to be the draw for Musk. The monetary value of the company will not mean much to him, but the power of influence will.
Musk himself admitted to not being interested in the economical factor. Instead, he sees Twitter as a potential source for giving users more control over what they view on the platform. He argues that by making algorithms open source, the public’s trust will grow. The open-source model would give users the ability to see the code that indicates how posts arise on their timelines. They would have insight as to how the algorithm both promotes and demotes tweets for them.
What is the social impact of such a purchase?
The European Union said that even with new ownership, Twitter would still need to abide by the Digital Services Act. The legislation will require social media companies to more aggressively fight misinformation and ban certain harmful online advertisements. It will go into effect in 2023.
This policy may become a problem for Musk if his plan is to moderate the platform less in an attempt to encourage free speech and debate.
Opponents of the deal argue that no one person should have the power to spend such an extraordinary amount of money while there are people throughout the country struggling to make ends meet. They also argue that a billionaire having that much power over one of the largest social media platforms in the world will have lasting effects on America’s democracy.
How will this impact investors?
While Twitter agreed to sell to Musk at $54.20/share, investors can buy stock for less. Twitter shares fell almost 4% on Tuesday, 26 April, the day after the announcement of the deal. This would make shares less than $50. This deal is enticing to investors who may seek to buy stock in Twitter before Musk takes it private.
Given that interest rates and inflation are rising, and the economy is slowing down due to the war in Europe, buying Twitter shares and holding onto them until the deal closes may seem worth it. If Musk is successful in closing his deal, investors would then receive $54.20 for every share they own. This is a 9% increase on the closing price that was announced on Tuesday.
As for investors in Tesla, they are concerned. Once it was announced that Musk would be selling his Tesla shares for the Twitter buyout, the electric-vehicle company’s shares dipped 12.2% overnight. This decreased the company’s value by $126 billion.
Musk has a track record for being successful in his ventures. However, Twitter and Tesla shareholders are questioning how he will effectively divide his time between the two companies.
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