Hubris and the Worst LBO in History
The Internet’s leading microblogging platform and home of The Discourse has turned in on itself and become The Discourse itself over the past several months beginning with Elon Musk’s April takeover bid at $54.20[1] representing between a 54%-38% premium depending on the point from which you do the measurement and an EV/EBITDA multiple of way-too-effing-much. After rejecting initial plans to shove a poison pill into this gift horse’s gaping mouth[2] Twitter Dot Com’s board listened to its shareholders who wanted to cash out on this rich offer and accepted.[3] Bluff called, evidently. After much bad-faith hemming and hawing about bots and other nonsense, Musk was looking down the barrel of being forced to follow through with his offer by a Delaware chancery court. So he closed. Here begineth the fun.
Beyond being the world’s richest man and a genuine pioneer in a few fields, Elon is one of the world’s preeminent Internet trolls.[4] It is in this context as troll that one can best understand what he is up to in buying Twitter. The world’s richest man wants to stick it to the “élites”—in this case people in the media who probably would need a geologic amount of time to equal his net worth and earnings. He claims to want Twitter to be a beacon of true free speech—it is easy to cynically interpret this as a place where you can freely scream slurs and spread conspiracy theories about Paul Pelosi while safe from people engaging in real hate speech and disinformation, i.e. making fun of Elon Musk. More charitably, he believes Twitter will be better with less content moderation. Either way, thumbing his nose at Twitter’s base of power users seems to be at least one of his core goals. Which I guess is a fun project if you are bored of launching rockets.
However, Elon’s wealth is very illiquid and he simply could not afford an all-cash transaction. Accordingly he recruited a few other equity investors like former long-term Ritz Carlton guest Al Waleed bin Talal Al Saud and a bunch of other serious institutional investors. That still wasn’t enough and left a yawning $25.5 billion chasm that needed to be filled with debt. So, Musk agreed to, tried to wriggle out of, and then was compelled to close on a transaction that can be viewed as The Worst LBO in History. Mitt Romney and Henry Kravis didn’t become Mitt Romney and Henry Kravis by borrowing against their own assets to buy businesses with poor cash generation capacity, all while saddling them with truly bonkers debt.[5] What’s more Elon’s Icarus Capital is getting 0&0 on outside equity money. Bravo, world’s richest man.
Surely nobody but the world’s richest man and alleged comprehensive business genius could turn this struggling ship around despite having weighed it down with so much debt that the ship in question has about one inch of freeboard.[6] In the words of Musk’s #1 competitor for society’s biggest troll and fellow absurd leverage enthusiast, Donald J Trump: “WRONG!” Musk’s Twitter now faces about $1 billion in annual interest expense, a modest increase of 2,000% from $50mm. Oh and to put that in perspective Twitter’s 2021 EBITDA was $211mm. YIKES! Holding revenue and expense constant, this is an almost nightmare scenario. Well surely, he can cut costs? Yes, he can and has by halving staff through one of corporate history’s most heartless and inept layoffs. While I am sure that there is plenty of flab to be trimmed from the corporate corpus of Twitter—this is surely going well beyond cutting to the bone and is more likely excising limbs and critical organs. Musk’s Weight Watchers plan amounts to wholesale amputation and hepatectomy. But it’s worse than that. Given the human capital-intensive nature of a tech business reliant on ad sales, it is almost certainly a lobotomy too.
Well surely then, he can just grow revenues! I guess he could, even though probably not enough to slake the contractually justified thirst of his and Twitter’s creditors. Sadly, his current plans to do that are predicated on being an idiot. Plan A appears to follow the framework proposed by the strategy geniuses of the Underpants Gnomes in South Park. Step 1: Piss off advertisers[7] though increased site toxicity[8] and correlated decline in brand safety as well as through outright antagonism.[9] Step 2: ?. Step 3: revenue growth!
Plan B isn’t much better and suffers from crossed wires with his real goal and idée fixe of annoying the “élites” by reworking Twitters Blue Checkmark system. Admittedly the Blue Checkmark system[10] is one of the world’s dumbest status symbols[11] and is due for serious overhaul.[12] Rather, Elon is going to change it into a premium service tier with some real and other dubious benefits for $96 a year[13] democratizing the Blue Checkmark and stripping the “élites” of their very non-cherished bauble. Of course, Elon sees that Twitter would still need a mark of verification and rolled out[14] the totally different Grey Checkmark authentication. Its prospects for adoption are not great, demand by normals for this semi-good is unknown and its elasticity for current holders doesn’t look good.[15]
One of the benefits your $96 Blue Checkmark buys is a 50% reduction in ads. OK, so how could this impact Elon’s ability to generate profit to pay the creditors? in this ad revenue-supported business Musk will trade half of the ad inventory for people who use Twitter most for $96 a year. So using very loose math and some no doubt tenuous proxies, if we assume that the top 10% of Twitters roughly 400mm users represents the target for the new Blue Checkmark and we can extrapolate that 92% of total tweets they generate is a decent proxy for their share of use and hence ad impressions. Furthermore, AdWeek forecasts $4.67 billion in 2022 ad revenue. That’s per New Bluecheck ad revenue of about $117. If they all take the $96 plunge Musk’s scheme could generate $1.5 billion in incremental revenue—hooray! Not so fast, at Twitter’s 2021 EBITDA margin of 4.03%, that’s only about $60mm in EBITDA for the rapacious creditors. Even at a radically improved margin it’s not a lot. And that’s if my assumptions are correct, CPMs and volume hold, and the plan is executed perfectly. This is of course a highly stylized scenario that is not gonna happen. This is admittedly loose math, but it shows the depth of the hole Elon has dug Twitter into and how hard it will be to build a ladder out.
Where now? Twitter was already a dog in the best of times as Meta, Alphabet, and the streamers were much better at selling ads. However, it is no longer the best of times. From a macro perspective, we are almost certainly heading into a recession or at least a prolonged period of uncertainty—not good for ad revenue. Furthermore all these tech companies are getting hammered by the end of the ZIRP times (which means Elon bought at near the top of the top which is reflected in his being forced into buying in the first place) very bad for exiting from this deal. Add in the fact that Elon has made some really, really bad decisions in structuring his acquisition with bonkers level debt and is making even worse decisions out of the gate on how to run this company. Structurally and executionally this whole deal is effed. In his capacity as Twitter CEO and as a margin borrower, Musk will be facing some very unpleasant calls with creditors who will be asking for their money, money that Twitter will not be able to generate. Perhaps this will be what extinguishes the perennial dumpster-fire that is Twitter Dot Com. Sadly, there will be much collateral damage including to Musk’s shareholders of his good, albeit very richly valued, company Tesla. Ultimately this company is almost certainly heading to bankruptcy or a deeply discounted sale—in either case Musk’s fate will resemble the closing act of Greek tragedy where man is confronted with the results of his own hubris. If it were just Musk taking himself down a peg, so be it. But people have lost their jobs and he has put his other companies in jeopardy—Elon has been the author of their fate as well.
[1] LOL 420 weed?
[2] Monumentally dumb
[3] Smart
[4] He is also a leading troll IRL—having shouted “boring” at a Tesla creditor who had the temerity to question how the then deeply cash negative automaker would be able to meet its debt service obligations on an earnings call
[5] I suppose in some cases this point is debatable—but at least from their perspective they weren’t personally on the hook too
[6] I make no apologies for nautical references
[7] It is worth noting Twitter is already regarded by these folks as the absolute dog of dogs of social media advertising channels
[8] See: joyous chorus of antisemitic slurs and the N-word
[9] See: tweets from Musk himself threatening advertisers who are walking
[10] Which started as a means of distinguishing who and who was not the real Ashton Kutcher
[11] Which many of its holders don’t actually give a flying F about
[12] Why not open up verification to all users to encourage people to tweet under their real names hoping against hope that the decrease in bots and anonymity would make Twitter less of a hell-site?
[13] An $8 monthly charge negotiated down from $20 by Stephen King
[14] Or did he?
[15] Bloomberg has said they won’t pay for it for their staff.
