TWITTER'S ENDGAME
Examining Elon Musk’s $54.20/share Bid for Twitter and the Board’s Response
April 19, 2022
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OVERVIEW
At this point, Twitter’s days as a public company are likely numbered. Whether Elon Musk, or a consortium of buyers involving Elon, prove successful is anybody’s guess but also somewhat besides the point. What we find more interesting is the questionable corporate governance and wasted potential since Twitter first went public.
In fact, one could argue if Twitter spent half as much effort on its actual business compared to staving off this particular takeover bid, the share price would be so high that Elon couldn’t afford to contemplate this in the first place. As they say, an ounce of prevention is worth a pound of cure.
To quickly summarize the situation:
Elon Musk bought ~9% of Twitter stock in the open market.
Elon Musk and Twitter agreed that Elon would join the board of directors and keep his ownership stake in the company below 15%.
Elon Musk changed his mind and offered to buy the remaining outstanding shares for $54.20/share.
Twitter’s board spent the weekend adopting a poison pill to protect itself against this particular takeover.
THE POISON PILL
Originally designed to protect against extremely hostile and coercive takeovers in the 1980s when corporate raiding was at its peak, the poison pill became a standard defensive tactic to thwart aggressive raiders and deter potential buyers from unwanted shareholder activism.
Of course, the tactic became common defense against any kind of unfriendly takeover. Board members are generally paid a few hundred thousand dollars to attend a handful meetings every year so, not surprisingly, they are financially incentivized to protect such a generous arrangement.
Make no mistake though. Implementing poison pills are a drastic measure for any board to implement. Essentially it works as follows. If an individual owns a larger percentage of the company than some pre-determined threshold, then the company can issue additional stock to every other shareholder at a steep discount. This serves to continuously dilute any potential buyer trying to accumulate stock in the open market.
Twitter’s poison pill is particularly amusing. If any individual acquires more than 15% of the shares outstanding, then every other shareholder can acquire $420 worth of Twitter stock at current prices and pay only $210 to so do, essentially giving them a 50% discount. The numbers set forth in the poison pill are obviously designed to take a shot at Elon Musk who also included the number 420 in his takeover bid.
Going forward, Elon will be forced to negotiate any potential takeover with the board directly or engage in a lengthy and costly proxy battle.
Funny enough, Twitter hired Goldman Sachs to help with its takeover defense. Meanwhile, the research analyst who covers it has a sell rating and a $30 price target. You just can’t make this stuff up.
CULTURE AND BOARD MEMBER INCENTIVES
In this instance, board member incentives have implications that reach far beyond clipping a few hundred thousand dollars per year for little effort. The real reason Twitter’s board is working so hard to resist this particular takeover boils down to deep philosophical differences about free speech.
Twitter has a reputation for prioritizing social and political matters above all else. Users, the technology stack, and the quality of the product are all afterthoughts, and maximizing the value of the company for shareholders is hardly considered.
In our view, the poison pill demonstrates Twitter’s reputation for disregarding shareholder value is accurate and comes from the top. This attitude appears to be a pervasive core belief and has been engrained into the company’s culture.
Twitter is often referred to as a clown car in a gold mine. We think that is an apt metaphor. The board owns a de minimis amount of stock and we are not surprised by this classic principal/agent problem.
(Side note: Voting on board members in general is another interesting corporate governance related topic. With passive investment vehicles gaining market share, the entities that control how the shares owned by ETFs will vote possess extraordinary influence. But that’s beside the point today.)
STOCK BASED COMPENSATION
One issue that we’ve had with Twitter over the years of evaluating it as a potential investment opportunity has been the stunningly egregious stock-based compensation. It is truly shocking.
SBC as a percentage of revenues has averaged 13% (!) per year in the past five years and 28% (!) per year since it went public.
INSIDER SELLING
It’s difficult for incentive structures to be aligned with shareholders when insiders have continuously sold stock since the company went public too.
Our concern has always been that these two examples may be symptoms of deeper cultural problems within Twitter, from top to bottom, and we could not reasonably underwrite owning shares in the past despite how attracted we were to the potential of the business model.
LEADERSHIP CHANGE REQUIRED FOR SHAREHOLDER VALUE CREATION
From a shareholder’s standpoint, it is undeniable that Twitter is in desperate need of a leadership change. The stock has gone nowhere since it went public and those at the helm appear to have little interest in creating shareholder value now.
One could argue that revenues have grown a lot in the past decade and the stock price is simply a victim of unrealistic expectations and a bubble valuation on its IPO (another reminder that starting valuations always matter eventually). But recent decisions still reaffirm our belief that this leadership group will prioritize philosophical, political, and social causes above shareholder value creation.
You may feel those things are more important than capital gains and we don’t necessarily disagree. But no matter what you value, this company has been a gigantic waste of potential for the past decade.
In an alternate universe under a different leadership group, we envision a scenario where the stock price could have been easily doubled from here while the company’s impact on society and public discourse could have been multiple folds more impactful and beneficial than it currently is today.
THE POINT
No matter what you feel towards Elon Musk – love him or hate him – it’s important to realize that Twitter’s management team and its board of directors are not shareholders’ friends either.