To level-set expectations up front: we’re dealing with Elon Musk here. No one knows what he might do or say next (including himself).

Much has been said regarding Musk’s activism in Twitter. What has not been reported, but I believe is nonetheless important, is that Musk’s actions to date have many characteristics of a sophisticated (and serious) buyer:

1. Musk’s 9% “toehold” position will save him $1.3bn if he ultimately acquires the company

   • 73 million shares acquired to date * ($54.20/share offer – $36.16/share cost basis) = $1.3bn in savings if he does take it private. Musk will only have to pay a premium for the shares he does not already own.

2. Musk’s offer is above the average premium (~30%) seen in public company sales

   • 54% premium to stock price before his investment; 38% premium to stock price day before his investment was announced

3. Musk hired Morgan Stanley, a leading financial advisor that is intimately familiar with Twitter and its shareholder base

   • Morgan Stanley running Twitter’s $2 billion share repurchase announced in February 2022

4. Musk is taking advantage of the turmoil in the executive suite

   • Activist investors often use changes in management & company turmoil as an opportunity to effect change

     • See: recent CEO transition at Hasbro, and subsequent emergence of Alta Fox Capital

What’s going on in the Twitter boardroom right now?

• A public corporation’s board owes its “fiduciary duties” exclusively to shareholders (no duty to protect fair speech, their best interest or employees, etc.)

• Board will evaluate the financial “fairness” of the offer relative to their financial advisors’ view of intrinsic value

  • Mr. Agrawal & management will prepare 5+ year financial projections

  • Financial advisor will evaluate:

    • Discounted Cash Flow

    • Public Company Trading Comparables (Meta, Snap, etc.)

    • Public Company Transactions (LinkedIn, etc.)

• Board will evaluate the other contingencies in Musk’s offer:

  • Regulatory approval

  • Legal and business due diligence

  • Financing contingency

3 Potential Responses:

1. Reject the offer

   • The bid is too low and is not fair value for shareholders

   • Execution risk is too high (too many contingencies)

2. Stall on the offer to further evaluate its merits and strategic alternatives

   • What’s the fair value of the Company? Let the market decide.

     • Fair to say Twitter is now “in-play”

     • Financial Buyers

       • Twitter lacks the cash flow to be a traditional “LBO” candidate

     • Strategic Buyers

       • Antitrust concerns

         • Senator Warren and Representative Jones’ proposed legislation “Prohibiting Anticompetitive Mergers Act” banning mergers over $5bn

         • Recent blocked deals: Aerojet Rocketdyne / Lockheed Martin, scrutiny on Spirit / Frontier / Jet Blue deal, scrutiny on Change Healthcare / UnitedHealth

3. Accept offer

   • Potential “go-shop” period

     • Enables Company to run a “market check” and determine if any buyers are willing to pay a higher price

       • See: Alleghany / Berkshire

Other Considerations:

• Poison Pills (AKA shareholders rights plan)

  • It does not preclude a sale – it only dilutes anyone from taking a stake above a certain percentage

    • Different ways to structure a poison pill, but see Kohl’s as a recent example: shareholders will get the right to buy new shares at a 50% discount if a person or group acquires a beneficial interest of 10% or more.

  • Enables to Board to consider proposals in an orderly manner without undue influence by shareholders

• Negotiated transaction vs. hostile takeover

  • Types of transactions and how they work

    • Typical public company sale: negotiated “one-step” merger

      • Agreement + execution of a negotiated merger agreement between buyer and seller; taken to shareholder vote (typically requires approval from a majority of target’s shareholders

        • See: Houghton Mifflin Harcourt

          • Passed shareholder vote despite grumblings from shareholders that offer was too low

        • See: Momentive / Zendesk

          • Struck down by Zendesk’s shareholders (faced vote due to share consideration)

    • Hostile Takeover

      • “Two” step tender offer – bypass the Board and take your offer directly to shareholders, obtain sufficient support from shareholders (90%) and “squeeze out” the remaining shareholders

        • See: Southwest Gas / Carl Icahn

      • Proxy contest – replace the Board at annual general meeting in a shareholder vote

        • See Kohl’s / Macellum situation

This article is not investment advice. The statistics and analyses herein are the author’s opinion and should not be relied upon as fact.